Essay Assignment_Alto_MBA_Financial Control System of the Volkswagen Group_Prof Teemu Malmi

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핀란드 Aalto 대학교 MBA 과제
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1. What are the main arguments?
1) Needs for new variables
Up to the end of the 1990s, Profit Margin, Sales Revenue and Profit Before Tax were the focus of operating control. But these variables don’t provide any information on the extent to which the capital employed in the company is earning a reasonable rate of return from the financial market and the investors’ perspectives. So Volkswagen group started to focus on a capital market-oriented variables on the capital employed, such as “Required Rate on Return” and “EVA”.
2) EVA = Operating Profit After Tax - Cost of Capital
Operating profit After Tax(at a flat rate)
Cost of Capital = Capital Cost Rate * Invested Capital
= Capital Cost Rate * (Operating assets- Deduction capital)
The cost of capital is the result of the capital cost rate as required by the financial market multiplied by the invested capital. The capital cost rate is the required rate of return as determined by the capital market. Operating assets consist of fixed asset(tangible fixed asset+intangible asset+capitalised development costs) and current assets(net inventory+receivables). To get an invested capital, we should deduct the deduction capital (trade payables +advance payments received) from the operating assets because the deduction capital represent a non-interest bearing credit to the company.
Cost of equity after tax = Risk-free interest rate + Market risk premium - Company specific risk premium(reflecting beta factor) + Country specific risk premium
Cost of debt after tax = Interest on debt - Tax advantage of debt
In other prospective, the cost of capital is the weighted average of the cost of debt and the cost of shareholders’ equity. It usually serves as a company’s general performance target. Total capital has to generate at least the “Required Rate of Return” based on its market value as the investor expect a return on the market value of their investment.
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