Entering Data for Shareholder Value Method Accounts

The Shareholder Value Method measures future free cash flows (from operations) less investments in fixed and working capital. It is not one period measure, but rather a measure of multiple year future free cash flows, discounted at the weighted average cost of capital. This approach is used by public companies to compare management's expectations to current market price of their stock and by private companies or divisions of large public companies, to obtain a proxy of the market value of their businesses.

For a more detailed explanation of these items, see Valuation Theory.

  To enter data for Shareholder Value Method Accounts (SVA):

  1. Access Tax and Valuation Options.

    See About Tax and Valuation Options.

  2. Select SVA tab.

  3. For Cost of Capital, click Inputs and enter the account values.

    The Cost of Capital is the weighted average costs of debt and equity. The rate should be entered as a percentage, not a decimal (5.57% is input at 5.57, not .0557). Oracle recommends that you use one rate for all periods.

  4. For Long-Term Cost of Capital, click Inputs and enter account values.

    The Long-Term Cost of Capital is used to calculate the residual value. The rate should be entered as a percentage, not a decimal.

  5. In Method to Use, select a method.

    There are six different residual value methods:

    • Perpetuity Method

    • Growth in Perpetuity

    • Value Growth Duration

    • Price/Earnings Ratio

    • Market-to-Book Ratio

    • Liquidation Value

  6. In Residual Value Tax Rate (%), enter a rate.

    The residual value income tax rate is applied during the years following the forecast period.

  7. In Perpetuity Growth Rate (%), enter a rate.

    Enter the perpetuity growth rate when using the Growth in Perpetuity method to calculate residual value.

  8. In Value Growth Duration (years), enter the number of years.

    Enter the value growth duration when using the Value Growth Duration method to calculate residual value.

  9. For Normalized Profit Adjustment, click Inputs and enter the values.

    You can use this item to change or “normalize,” for valuation purposes of the period-by-period values for Taxable Operating Profit that you consider to be abnormally high or low due to prevailing industry or economic conditions that you do not expect to continue.

    If you enter adjustments for periods, the amount is added to Taxable Operating Profit for each period entered and used in calculating Residual Value. While it affects the valuation, it does not change Operating Profit as it appears on the Income Statement.

    Note:

    This adjustment is only appropriate if you are using one of these residual value methods that use a perpetuity cash flow in its calculation: Perpetuity Method, Growth in Perpetuity and Value Growth Duration.

  10. For Market-to-Book Ratio, click Inputs and enter the values.

    Enter the Market-to-Book Ratio when using the Market-to-Book Ratio method to calculate Residual Value.

  11. For Price / Earnings Ratio, click Inputs and enter the values.

    Enter the Price/Earnings Ratio when using the Price/Earnings method to calculate Residual Value.

  12. For Debt Discount / (Premium) (%), click Inputs and enter the values.

    The Debt Discount/(Premium) is used in the calculation of the Market-To-Book Residual Value and Price/Earnings Residual Value. The Debt Discount/(Premium) is used to adjust the book value of Debt and/or Preferred Stock to market values.

  13. For Normalized Earnings Adjustment, click Inputs and enter the values.

    You can use this to change or “normalize,” for valuation purposes of the period-by-period values for Income Available for Common Shareholders that you consider to be abnormally high or low due to prevailing industry or economic conditions in that year which are not expected to continue.

    If you enter adjustments for periods, the amount is added to Income Available for Common Shareholders used in calculating the Price/Earnings Residual Value for valuation. It does not change Income Available for Common Shareholders as it appears on the Income Statement.

  14. For Liquidation Value, click Inputs and enter the values.

    This item represents your estimate, in future value currency, of what the “price tag” of the business is in each year of the forecast period, based on your expectations of prevailing conditions in that period. You must incorporate the costs of liquidation, including such items as transaction cost and recapture tax in this value.

  15. Click OK.