Shareholder Value Approach According to Rappaport

Shareholder value according to Rappaport is calculated using the following

formula:

Shareholder Value = Corporate value – External capital; where:

Corporate value  = Present value of operational cash flows

    during the forecast period

   + Residual value

   + Market value of negotiable securities

The basic elements of the corporate value are the operating cash flows, capital costs (due to discounting), the length of the forecast period, and the residual value (see below). Future operating cash flows are planned using value drivers.

Rappaport sees the following value drivers:

Cash Flow = Cash inflows – Cash outflows

     = [(Previous year’s sales) x (1 + Growth rate of sales)

x (Operational profit margin)

x (1 – Average corporate profits tax rate)]

– Additional investments in fixed and current assets