Value Drivers: Key Factors Affecting Corporate Value

There are six key macro variables affecting values of discounted stream of cash flow from operations:

  • Sales Growth Rate (g)

  • Operating Profit Margin (p)

  • Cash Taxes on Operating Profit (t)

  • Fixed Capital Investment (f)

  • Incremental Working Capital Investment (w)

  • Cost of Capital (K)

These variables, or value drivers, determine each year's cash flow from operations. After each year's cash flow from operations is calculated, those flows are each discounted based on the cost of capital (K).

Because these value drivers determine the expected cash flow from operations, you can evaluate these factors to determine which ones have the greatest impact on corporate shareholder value.

To learn the value drivers, use Scratchpad to estimate corporate value, so you can focus on key valuation variables.

See Using ScratchPad Valuation Calculator.

The inputs are:

  1. Number of Forecast Periods

  2. Sales (Last Historical Period)

  3. Sales Growth Rate (G)

  4. Operating Profit Margin (P)

  5. Incremental Fixed Capital Investment (F)

  6. Incremental Working Capital Investment (W)

  7. Tax Rate on Operating Profit (Tc)

  8. Residual Value Income Tax Rate (Tr)

  9. Cost of Capital (K)

  10. Marketable Securities and Other Investments

  11. Debt and Other Obligations

  12. No. of Common Shares

After completing your scratchpad analysis, which holds each of these variables constant throughout the forecast period, you can use a more explicit model in Strategic Finance to evaluate these variables in greater detail and changing over time. Using the Scenario Manager, you can determine the impact on shareholder value of changing variables contributing to value drivers.