Management Control System

Return On Investment
Group Members :Vinod Dhone. Neekita Dhakne. Aarti Kokate.

Points we are going to cover

Meaning

of Return on investment Organizational Goals: Economic Goals Profits Profitability Maximization of Shareholders Value

MEANING
A performance measure used to evaluate the efficiency of an investment.

To

compare the efficiency of a number of different investments.

How to Calculate ROI???

E.g. ABC Ltd arrange a new marketing program that is expected to cost Rs.500,000 over the next five years and deliver an additional Rs.700,000 in increased profits during the same time, then what is the ROI?

700000-500000 ROI= ----------------------*100 = 40% 500000

Organizational Goals
Organizational goals explain how an organization intends to go about achieving its mission. For example, a car manufacturer might identify its mission as increasing market share & making a profit. Establishing goals of introducing a new model of car each year and providing the highest quality spare parts to customers will enable it to achieve that mission.

Economic Goals
Market

share Profit margin Return on investment Technological advancement Customer satisfaction Shareholder value. Profit in the short run & value in the long run.

Profits

Profitability Factors

Degree of Competition Strength of Demand State of the Economy Substitutes Discriminate price

Maximization of Shareholders value

Shareholder value is defined as the present value of free cash flows from now until infinity, discounted at a rate that reflects the risks of these cash flows.

Conti
Position and power of Shareholders
Medium-sized

or large corporations are owned by

thousands of shareholders
Shareholders Shareholders

diversify holdings in many firms are concerned with performance of

entire portfolio and not individual stocks.

Conti
Most

shareholders are not well informed on how well

a corporation can do and thus are not capable of determining the effectiveness of management.
Not

likely to take any action as long as they are

earning a satisfactory return on their investment

Views

the firm from the perspective of a stream of

earnings over time, i.e., a cash flow.

Conti
Must

include the concept of the time value of money. Rupees earned in the future are worth less than rupees earned today. Future cash flows must be discounted to the present. The discount rate is affected by risk.

Conti
Two

major types of Risks: Business Risk Financial Risk

Business Risk involves variation in returns due to the ups and downs of the economy, the industry, and the firm. All firms face business risk to varying degrees.

Conti

Financial Risk concerns the variation in returns that is induced by leverage.

Leverage

is the proportion of a company financed

by debt. The higher the leverage, the greater the potential fluctuations in stockholder earnings. Financial risk is directly related to the degree of leverage

Conti

The present price of a firms stock should reflect the discounted value of the expected future cash flows to shareholders (dividends).

P=

D1 (1+ k )

+ (1+ k ) 2 + (1+ k )3 + + (1+ k ) n

D2

D3

Dn

P = present price of the stock D = dividends received per year K = discount rate N = life of firm in years

Market Value Added (MVA)

MVA represents the difference between the market value of the company and the capital that the investors have paid into the company.

Market value includes value of both equity &debt. While the market value of the company will always be positive, MVA may be positive or negative.

(EVA)

EVA

= Actual Profit Expected Profit.

If

EVA is positive then shareholder wealth is

increasing. If EVA is negative, then shareholder wealth is being destroyed.