Corporate Value Creation. Karlson Lawrence C.

+ 1)

      For Year n + 2

      [2-33]

      Net Invest n + 2 NetInvest₍n _{+ 2)} = (NI₍n _{+ 2)})(IR₍n _{+ 2)})

      [2-34]

      Net Income n + 2 NI₍n _{+ 2)} = NI₍n _{+ 1)} + (NetInvest₍n _{+ 1)})(NiROCE₍n _{+ 2)})

      [2-35]

      Or NI₍n _{+ 2)} = (NI₍n _{+ 1)})[1 + (IR₍n _{+ 1)})(NiROCE₍n _{+ 2)})]

      Cash Flow n + 2 CFaIA₍n _{+ 2)} = NI₍n _{+ 2)} − NetInvest₍n _{+ 2)} ± NetInt₍n _{+ 2)}

      [2-36]

      ± ΔWC₍n _{+ 2)}

      [2-37]

      Or CFaIA₍n _{+ 2)} = (NI₍n _{+ 2)})(1 − IR₍n _{+ 2)}) ± NetInt₍n _{+ 2)} ± ΔWC₍n _{+ 2)}

      and so on.

      The discussion in Appendix D of these equations makes it clear that the equations that were derived did not place any restriction on what the Investment Rate and Net Income Return on Capital Employed must be in any year or relative to any other year. In other words, they are completely general.

      Special Case: Constant Investment Rate and Net Income Return on Capital Employed

      Earlier it was mentioned that over time IR and NiROCE often tend to be relatively stable. Therefore, in situations where the Investment Rate and/or Net Income Return on Capital Employed don't change from year to year, the subscripts on these terms can be dropped and they can be treated as constants. It's possible to restate Equations [2-8], [2-16], [2-18], [2-15], [2-12], [2-14], and [2-31]–[2-37] with IR constant and NiROCE variable, IR variable and NiROCE constant, and both IR and NiROCE constant. See Appendix D for details.

      Special Case: Focus on Operational Cash Flows

      The equations in the “General Model” deal with Operational Cash Flows as well as Interest (Capital Structure) and Changes in Working Capital (Balance Sheet). In some situations the impact of Interest and Changes in Working Capital can be ignored. Here are some of the considerations.

      ±NetInt: The amount of debt a company takes on is a function of its capital structure and in the final analysis this is decided by the owners of the business (shareholders) via the board of directors. In practice, however, the CEO and his management team are responsible for everything that happens in a business. Therefore the management team can't get a free pass and hide behind the board of directors when it comes to capital structure. Stated simply, they have to deal with the hand that has been dealt and improve it over time and provide sound proposals for financing growth.