Transcript Class 2 - University of Southern California

Vyaderm Case
April 27, 2006
J. K. Dietrich - FBE 532 – Spring 2006
EVA Calculation: Dermatology
1999a
($000)
2001Ec
2000
2002Ec
NOPAT:
Net Income Before Tax
$
Research & Development Expense
1. R&D Adjustment
Advertising Expense
2. Advertising Adjustment
3. Goodwill Amortization
Net Current Operating Profits Before Taxes
Current Year's Income Tax Paymentsb
Net Operating Proft After Taxes (NOPAT) $
20,000 $
20,000
(14,973)
45
(41)
2,500
27,531
(7,875)
19,656 $
51,000 $
39,000
(20,638)
50
(46)
2,500
71,866
(18,725)
53,141 $
27,848 $
27,378
(23,616)
55
60
2,500
34,114
(10,622)
23,493 $
32,861
32,032
(27,101)
61
(55)
2,500
40,297
12376
27,921
CAPITAL:
Net Operating Assets
1. Capitalized R&D
2. Capitalized Advertising
3. Accumulated Goodwill Amortization
Capital
110,000
34,598
44
7,500
152,142
135,000
52,960
48
10,000
198,008
153,164
56,721
53
12,500
222,439
180,734
61,653
59
15,000
257,445
$
$
Capital Charge (11%)
Economic Value Added (EVA)
a
$
$
(16,736)
$
2,920
$
$
(21,781)
$
31,360
$
$
(24,468)
$
(975) $
(28,319)
(398)
EVA w as introduced in the Derm atology Division in 2000. The 1999 EVA figures w as calculated retroactively
solely to set 2000 EVA targets. The 1999 EVA calculation includes am ortizations of 1995 R&D expense of $10,673.
b
Taxes = 35% of (Net Incom e Before Tax + Goodw ill Am ortization)
c
2001 and 2002 estim ated results obtained by forecasting four financial statem ent item s at historical grow th rates
from 1999 base: net incom e before tax at 18%, R&D at 17%, consum er advertising at 10% and net operating assets
at 18%.
J. K. Dietrich - FBE 532 – Spring 2006
Calculation of Bonus
($000 except bonus)
Economic Value Added (EVA)
EVA Improvement Goal
EVA Target
Interval
Actual EVA Improvement
EVA Performance
North American Manager's Bonus
Base Salary
Target EVA Bonus (60% Base Salary)
Starting Bank Balance
1. Calculated Bonus
New Bank Balance
1999
2000
2001E
2002E
Old Model EVA Year 1 EVA Year 2 EVA Year 3
$
2,920 $
31,360 $
(976) $
(398)
2,150
2,510
2,510
5,070
33,510
1,174
12,000
12,000
12,000
$
$
28,440 $
319%
200,000
120,000
$
382,897
382,897
Pay Out 100% of Available Target
Plus 50% Remaining Bank Balance
2. Total Bonus Payout
$
120,000
131,449
251,449
Ending Bank Balance
$
131,449
J. K. Dietrich - FBE 532 – Spring 2006
$
(32,336)
-187%
200,000
120,000
578
87%
$
131,449
(224,858)
$ (93,410) $
200,000
120,000
(93,410)
104,279
10,869
10,869
$
(93,410)
Goals of Financial Management
 Maximize
shareholders’ wealth
 Harmonize managers of many units of firm
 Connect managers’ decision to overall
corporate goals in lower divisions
 Managers must perceive relation between
their decisions, corporate goals, and
compensation
 Financial theory must be tempered by
common sense
J. K. Dietrich - FBE 532 – Spring 2006