MARGA

A Business Simullations GmbH, Scchloss Gracht

ReviewingCompanyPerformance
MARGABusinessSimulation
@Nokia Networks:
LeadingwithInfluenceI
MARGA Business Simulations
Schloss Gracht, D-50374 Erftstadt
Phone : +49 (0) 2235 / 406 364
Phone.:
E-mail: info@marga.de

Parametersof the CapitalMarkets

Theglobalizedcapitalmarketshavemassivelyincreasedperformancepressureon
companies.

Globalisation of capital markets (greater variety of investment possibilities)

Transparency of capital markets (more selection possibilities)

Increased requirements
of capital investors
Increased Competition
for investment capital
Open communication and information according to international standards
Minimum request is a risk-adjusted return on the invested capital

Value Based Corporate Management

MARGA Business Simulations GmbH

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MARGAValueAdded
Acompanygainsvaluewhentheincomeexceedsthecapitalcosts.

Equity
Debt

EBIT
((Earnings
g before
Interest and Taxes)

MARGA Business Simulations GmbH

Cost of Capital

MARGA
Value Added

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EBIT

EBIT shows the operating

income
without extraordinary and
onetime effects,
without financing issues
without tax effects.
Advatage:
Focus on the operational
g
strength
Easier to compare

MARGA Business Simulations GmbH

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CapitalCosts
Acompanyscostofcapitalisthetotalcostforbothequityanddebt.Theydependon
investmentrisk.

The interest rate is determined

b the
by
h capital
i l markets
k
and varies according to the investment
risk.

Return
rate
in %
Capital costs
in EUR
Interest bearing
Interest-bearing
capital in EUR

Consider
C
id equity
it and
d debt
d bt
with different risk levels.

Return
rate
in %
Cost of
equity Cost of
debt
Interest-bearing
p
in EUR
capital

MARGA Business Simulations GmbH

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Cost of Debt
The interest rate for debt depends on the risk the loan creditor is disposed to
considering
Loss or delay of interest payments and
Loss or delayy of the loan value itself.

Interest rate
High risk /
low credit rating

Market rule:
High risk leads to low credit rating
leads to high interest rate

Factors influencing credit rating:

Gearing/Leverage (debt-equity ratio)
Amount of equity
Net income
cash flow over debt (pay-back ability)

MARGA Business Simulations GmbH

Management quality
Productivity
Product technology
Customer satisfaction

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Cost of Equity
Theequityyieldmirrowstherequirementsofriskappropriateinterestcalculation.

E it yield
Equity
i ld = risk-free
i kf
return
t
rate
t + risk
i k premium
i
Equity
return
t
off a
company

Requested minimum return

f a risk-carrying
for
i k
i share
h

Return of a riskcarrying,
i
but diversified
portfolio

Risk p
premium

Risk-free return
Capital Asset
Pricing Model

MARGA Business Simulations GmbH

=1

Beta-factor
(Risk measure)

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Weighted Average Cost of Capital(WACC)

TheweightedaveragecostofcapitalWACCequalsthereturnratewhichthecapitalmarket
expectsfromthecompany.

Return rate in
%

Total capital costs (EUR) =

Interest-bearing capital (in EUR) x WACC (in %)

Expected equity yield

WACC
Interest rate for debt

Cost of
equity
Cost of
debt

The capital costs are the

amount of cash the
capital markets expect
as payback on
interest-bearing capital
according
di tto th
the
companys specific risk
profile.

Interest-bearing
capital in EUR

MARGA Business Simulations GmbH

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