Economic Profit Approach According to Copeland, Koller and Murrin

The concept put forward by Copeland, Koller and Murrin of McKinsey states that equity value, which corresponds to the stock market value of the company, is instrumental in evaluating the strategy. The central value in this Performance Measurement is EP, which expresses the increase in value by period. Economic profit is determined by multiplying invested capital by the difference between return on invested capital (ROIC) and the WACC. Here, ROIC is the measure for the return on investment.

Economic Profit = Invested Capital x (ROIC – WACC)

Free cash flows, which are indirectly derived on the basis of budgeted financial statements, are discounted. In addition, the following are added: net operating profit less adjusted taxes (NOPLAT) and expenses not affecting payments. Investments in fixed assets and net current assets are deducted. Or free cash flows can be determined using value drivers (Copeland/Koller 1998, p. 199). In this case, the capital costs of the company are also determined using the WACC approach with the target capital structure as a weighting factor. The residual value after the explicit planning time period is calculated either as a liquidation value or a continuation value. In the case of continuation, Copeland et al. take future growth into account by including a growth rate in the perpetual bond formula.