Strategic Financial Management Essay Example | Topics and Well Written Essays - 3500 words

Strategic Financial Management - Essay Example With an investment of 4.8 billion, the vision of Scottish Power is to be the UK's best-integrated energy supplier and a world leader in Renewable as a vertically integrated energy company. In May 2005, Scottish Power sold it's regulated US business for 2.25 billion in cash and had returned to the shareholders in June. In 2006, it achieved profit before tax 675 million, which was 47%, increase of the previous year. Adjusted earnings per share for continuing operation at 27.9 pence, which were 46% ahead. The adjusted earnings per share for the group at 44,1 pence were 22% ahead. Dividend payable on the new ordinary shares in issue following the return of cash capital reorganisation, was 9.4 pence per share bringing the total dividend for the year to 25.0 pence in respect of each ordinary share held on the relevant record date for last three years. The Market value of the shareholder's equity is directly observable from the capital markets. In theory, the market value should be equal the warranted economic value of the firm. The true economic value of a firm or business or division or project of any strategy depends on the cash flows and the appropriate discount rate. Here we shall discuss briefly three most commonly advocated methods of shareholder value. The first method, called the free cash flow method, uses the weighted average cost of debt and equity 3 to discount free cash flows. You can recall that free cash flows are calculated as follows: Here,PBIT= profit before interest and tax, T= corporate tax rate, DEP= tax depreciation, ONCKI= other non-cash items,NWC+ change in net working capital 4,CAPEX= incremental investment. Terminal or residual value reflects the value of post-planning cash flows. Thus, the economic value or simply value of a firm or a business is: The value of a firm or a business generating perpetual FCF will be as follows: We may recall that FCF estimates do not make any adjustment for interest charges. Thus, FCF do not include financing 5 effect. The weighted average cost of capital (WACC) includes after tax cost of debt. Hence, the financing effect is incorporated in WACC rather than cash flows. WACC, you may, recall, is calculated as follows: We may recall that WACC is based on assumptions that the firm has an optimum 6 capital structure and that debt is perpetual. The second method calculate the economic value of a firm or a business into two parts: Notice that ku is the cost of capital of an un-levered firm. For the levered firm, the second part includes the value of interest tax shields (VITS): Thus, the value of levered firm of business is: Value of a levered firm = Value of a un-levered firm+ Value of interest fax shield We can obtain value