BUS 424 Lecture Notes - Lecture 7: Controllability

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 424
• Professor: Johnny Jermias

Document Summary

Objective: maxi market value/economic income + shareholders" wealth => perf measures go up/down when value created/destroyed as employee contribution not directly observed (summary measure as reflect bottom line of multiple perf areas) Not fully reflect future perf: plans, prospects, cash flows, risks due to competitive sensitivity, not feasible for all business. Accounting measure: residual (ni, op, ebitda, ri), ratio (roi, roe, roa) Most important at below top level mgm. Not economic income: loss for start up firm, transaction oriented, past, dependent measurement method, bias: conservatism principle (rapid expense of long term investment r&d), ignore intangibles, cost of equity capital, risk. Local managers = experts in product/markets, decisions quickly, motivated, entrepreneurial + provided career development. Reflects trade off btw r, c, i. Easily understood link perf at various levels + contribution to roi: company = roe, divisional = roa. No suboptimization issue when capital charge >= cost of capital. Denominator: measurement fa, induce debt financing (roe), not replace asset (roa)