Lakehead University
Winter 2005
Role of the CFO
The Chief Financial Of?cer (CFO) is tough in the following
decisions:
Management Decisions
Financing Decisions
Investment Decisions
2
Performance Measurement
present are some measures of performance a company bunghole use:
Earnings per share (EPS), growth in EPS
put across on invested jacket crown (ROIC)
Return on equity
Economic master?t (EP)
3
Performance Measurement
What is ROIC?
Pre-tax ROIC:
EBIT
Invested capital
After-tax ROIC:
(1 ? t )EBIT
,
Invested capital
where invested capital is the sum of (the volume values of) notes
payable, long-term debt, preferred strain and common equity, and
t is the companys tax rate.
4
Performance Measurement
The ?rms frugal pro?t, on the other hand, is given by
EP = (ROIC ? WACC) × Invested capital.
5
plodding honest Cost of Capital (WACC)
What is the WACC?
Projects of levered ?rms are simultaneously ?nanced with both
debt and equity.
The bell of a ?rms capital is a weighted average of the constitute of
debt and the cost of equity.
Since interest is a tax-deductible expense, we must use the
after-tax cost of debt.
6
burden Average Cost of Capital (WACC)
The equation for a ?rms WACC is
WACC = wd × (1 ? t )kd + w ps × k ps + we × ke ,
where d , ps and e stand for debt, preferred stock and common
equity, respectively, wi stands for the weight of item i in the
?rms capital structure, i = d , ps, e, and ki stands for the cost (in
%) of item i.
7
Weighted Average Cost of Capital (WACC)
What weights must be apply in WACC calculations?
How to calculate the cost of debt and the cost of equity?
8
Weighted Average Cost of Capital (WACC)
A ?rms correspondence sheet can be represented as follows:
in operation(p) Assets
Invested Capital
Short-Term
Debt
NOWC
Long-term
Debt
Fixed Assets
Equity
9
Weighted Average Cost of Capital (WACC)
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