Influence of Corporate Strategy on Investment Return

Corporate Finance

Devansh jani Roll No . 17 PGDM Sem III

Introduction
Definition - corporate strategy The overall scope and direction of a corporation and the way in which its various business operations work together to achieve particular goals.

Investment Return
The percentage change in value of the investment over a given period of time.

 Cost of Capital The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity Minimum rate of return which a company is expected to earn from a proposed project so as to make no reduction in the earning per share to equity shareholders and its market price. In economic terms there are two approaches to define CoC: 1. It is the borrowing rate of the firm, at which it can acquire funds to finance the proposed project 2. It is the lending rate which the firm could have earned if the firm would have invested elsewhere CoC is a combined cost of each type of source by which a firm raises funds.

Corporate Strategy

 Analyzing existing projects: Analyze the existing investments project by project, by looking at the cash flows on individual projects and measuring returns against the firms cost of capital. We may also look at the projects collectively and measure the return on the portfolio in comparison with the firms hurdle rate. Analyze individual project using cash flows: We can measure the returns comparing them with the returns projected , when we invested in the projects originally We could also measure the NPV or IRR of the project.

Corporate Strategy

Corporate Strategy
To Generate Positive Cash Flows
Cash flow analysis:
We look at the entire portfolio and attempt to compute the amount invested vis--vis the cash flows generated. The difficulty is that these investments would have been made at different points in time and due to the time value of money they cannot be exactly aggregated. We may use Cash Flow Return on Investment (CFROI).

Accounting Earnings analysis:

Accounting earnings based measures are popular since earnings can be obtained easily from financial statements, their measurement is governed by common accounting standards, and the earnings for a portfolio of projects can be linked to the cash flows on these projects, with assumptions about how much has been reinvested into the firm.

Corporate Strategy
Economic Value Added (EVA)
It is a value enhancement concept. It is the measure of the surplus value in rupees created by a firm or project and is measured by the following: Economic Value Added (EVA) = ( Return on capital Cost of capital) x Capital Invested

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