Archive for the 'Finance Questions' Category

Nov 25th 2006 10 Questions About Growth that Every CEO Should Know How to Answer

  1. What is your TSR aspiration? Is that aspiration appropriate given the expectations embedded in your stock price and the ability of your plans to deliver improved performance?
  2. How much growth do you need in order to deliver on that aspiration? What target revenue-growth rate is required in order to meet your goal given the momentum contribution of other TSR drivers?
  3. Will optimizing growth and margins in your existing businesses be sufficient to meet your goal? Or will TSR success require you to consider a more radical strategy?
  4. What drives the differences in valuation multiples in your industry? Will your growth plans enhance or erode your multiple relative to peers?
  5. Will your growth initiatives create more TSR than alternative uses of cash or capital? In particular, what would be the impact of increasing dividend payout rather than investing in growth?
  6. Is your investor mix aligned with your growth agenda? If not, do you have a plan for migrating to investors who are likely to be more closely aligned with your strategy?
  7. Is there a balance between your sustainable growth rate and the growth rate of your served markets? If not, what is your plan for effectively using excess cash to optimize TSR?
  8. How will today’s growth initiatives affect your ability to find growth and deliver superior TSR in the future? In particular, what will be the impact of your growth initiatives on your company’s average return on capital?
  9. Do you need to revisit your company’s TSR target and strategy in light of your answers to the above questions? If so, do you have a process in place for doing so?
  10. Are your management team, board, and investors aligned on the optimal role for growth in achieving your TSR objectives? If not, do you have a plan for creating such an alignment?

Source: Spotlight on Growth: The Role of Growth in Achieving Superior Value Creation / Eric E. Olsen, Frank Plaschke, Daniel Stelter / Boston Consulting Group (BCG), September 21, 2006

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Aug 23rd 2006 Questions About Capital Investment

Most companies incorporate five basic building blocks into their financial reporting: the two sides (active and passive) of the balance sheet including the asset register, a profit-and-loss statement, an investment plan or budget, and some form of competitive benchmarking. Recently, shareholder-value-management indicators have been added to the list. These six measures answer some basic questions:

  • How much capital do we have, what kind is it, how much did we pay for it, and how much is it worth now? (from the active side of the balance sheet, supported by the asset register)
  • How productively are we using our capital, how will we reward equity capital, and what will our debt capital cost? (from the profit-and-loss statement, in relation to the balance sheet)
  • On what basis is capital provided? How secure is the capital base – is the financing long-term or short-term? What reward structures – equity or debt – have we arranged with capital providers? (from the passive side of the balance sheet)
  • How much and what kind of new capital will we need, what will we use it for, where will it come from, and what returns can we expect? (from the investment plan)
  • Do we use our capital more productively than our competitors do? (from competitive benchmarking of financial returns)
  • How much value are we creating for shareholders with our current level of return on capital? (from shareholder-value-management indicators)

Source: Valuing the Assets of the New Economy / Felix Barber, Ralf Dreischmeier, Ulrich Villis / Boston Consulting Group (BCG), October 15, 2000

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