Samenvatting
Summary - Corporate Finance
- Instelling
- Erasmus Universiteit Rotterdam (EUR)
Summary of all the relevant topics for the exam
[Meer zien]Voorbeeld 4 van de 40 pagina's
Voorbeeld 4 van de 40 pagina's
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Voorbeeld van de inhoud
Lecture 1:The objective of the firm
- Many companies are currently value destructive on SV and EV
- Solution:
- Company objective and strategy is starting point for value creation
- Challenge 1: incorporate social and environmental goals in objective and strategy
- Challenge 2: move from static to dynamic perspective
- Envisage transition pathways towards value creation on SV and EV
- A company’s transition preparedness is key determinant of its long-term value
How to measure a company;s sustainability profile?
- Finance seems quite good at estimating risk
- Sustainability risk of company → measured by ESG rating
- Adjusting discount rate r for ESG risk
- But asymmetric information
- ESG ratings are poor signal
- Need to go deeper: social foundations + planetary boundaries ← affecting CFs and r
Planetary boundaries
- The planetary boundaries framework defines a safe operating space for humanity within boundaries of 9
productive ecological capacities of the planet
- The planetary boundary lies at the intersection of the green and orange zones4
Social foundations
- Kate Raworth defines the social foundations as the social priorities, grouped into three clusters, focused on
enabling people to be:
1. Well: through food security, adequate income, improved water and sanitation, housing and healthcare;
2. Productive: through education, decent work and modern energy services; and
3. Empowered: through networks, gender equality, political voice and peace and justice
- UN’s Universal Declaration of Human rights:
- “recognition of the inherent dignity and of the equal and inalienable rights of all members of the human
family is the foundation of freedom, justice and peace in the world”
What is value creation?
- In financial terms, value creation is defined as an increase in the net present value (NPV) of a company’s projects
- FV is often generated at the expense of SV and EV as resources are depleted without sufficient investments in
maintaining them
- Responsible companies manage for integrated value creation (profit and impact) rather than merely shareholder
value (profit)
,The alignment of FV, SV and EV
- External impacts (also called externalities) are costs or benefits that are created by organizations but whose costs
are borne by society as a whole
- A way to improve the alignment between FV, SV and EV is to ensure that companies charge true prices or
integrated prices (prices that include all hidden costs)
- Currently, many companies are value destructive on SV or EV
- For society and the economy to operate within social and planetary boundaries, we need companies on aggregate
to stop being value destructive on SV and EV
Why is it in companies’ interest to manage for integrated value?
- If a company management neglects SV or EV, that will hurt long-term FV as well
- Ethical case - license to operate → corporate responsibility (case for SV and EV)
- US survey shows that 63% of US citizens (including 71% of millennials) expect companies to contribute
to social and environmental challenges (Cone Communications, 2017)
- Companies that create FV at the expense of SV or EV are likely to lose their license to operate at some
stage
- Business case – long term value creation (case for FV)
- Companies that create value on SV and EV are more likely to be value creative on FV in the long run
- As external impacts are being internalized they affect FV
Internalization
, - Rationally, some companies are better off if they continue to externalize their large costs on SV and EV, if:
1. Companies are not interested in double materiality
2. There is no threat of internalization
- We distinguish four driving forces behind the internalization of SV and EV into FV:
1. License to operate
2. Regulation and taxation
3. Technological advancement
4. Customer preferences
Double materiality
- Double materiality takes the concept of materiality in sustainability reporting one step further. According to
double materiality, companies must report both on how their business is impacted by sustainability issues
(“outside-in”) and how their activities impact society and the environment (“inside-out”).
- Example: in the financial services industry involves how banks review their lending practices and loan
portfolios to make sure they're not indirectly financing activities that are harmful to the environment.
- Financial Materiality: Focuses on the significance of financial information in traditional reporting for investors
and creditors.
- Impact Materiality: Concerns the significance of non-financial ESG factors in sustainability reporting, considering
their impact on long-term success.
Where does value come from?
- Since integrated value means that FV, SV and
EV need to be positive, this raises the question
of what to prioritize and how to balance these
types of value
- Choice of parameters b and c by
company board; FV has parameter of 1
- 𝐼𝑉 = 𝐹𝑉 + 𝑏 × 𝑆𝑉 + 𝑐 × 𝐸𝑉
- Focus and balancing should depend on the
company’s:
1. Purpose
2. Area(s) of value destruction
Purpose
- A company finds focus in its mission or purpose
- Why and for what, does the company exist?
- What societal need does it serve?
- What value does it provide for its customers?
- What type of value should it focus on, without losing sight of other types?
- Example:
- Levi wanted to make good trousers for working men (jeans) ← SV
- Elon Musk wanted to make an electric car that looks attractive (Tesla) ← EV
Strategy
- Based on its mission, focus, and competitive landscape, a company can build its strategy
- A strategy is the plan chosen to achieve a desired future state
- Hambrick and Fredrickson claim a strategy needs to have 5 parts:
1. Arenas: in which markets is the company going to be active?
2. Vehicles: how is it going to get there?
3. Differentiators: how can the company win in the marketplace?
4. Staging: what will be the speed and sequence of moves?
5. Economic logic: how can returns be obtained?
, Business model
- A successful business model has 3 components:
- Customer value proposition: helps customers perform a specific ‘job’
- Profit formula: generates value for the company
- Key resources and processes: people, technology, products, facilities and brand to deliver value
- To change a company’s value creation profile on FV, SV and EV, this involves strategic changes to the
components of its business model
Stakeholder impact maps
- Stakeholder impact maps can be used to investigate what a company’s most material issues are
- It outlines the company’s main stakeholders, their main goals, and the way the company helps them (positive
impact) or hurts them (negative impact)
Sustainability = transition
- The move from a negative social and/or
negative value to a positive value profile across
all three value dimensions is often part of a
wider transition in the economy
- Transition is about transformational change
rather than incremental change
- The x-curve of transition dynamics
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