Homework
A lot of talk recently has been about the concept of economic evaluate, which is a trademark concept by Stern Steward Company. And basically, what they sell is the way to evaluate the divisions within the firm in terms of what they call economic evaluate, which really means what is added into share holder value. Let me go through the logic of what they suggest that you do in order to do the EBA analysis and this is just a sketch of what they suggest. Well, suppose we are looking at a corporation, and this corporation has got some overall weighted average cost capital that we can obtain these from the campaign. And suppose that cost capital is12%, and this corporation is got, suppose that it¡¯s got two different divisions, and there¡¯re different businesses lives. Now, one way to do performance evaluation would be to say well the hurtled rate for our company is 12%. So you¡¯d better make in division one, that at least 12% return on your investment, in order to enhance your holder value, in division two, you¡¯d better do the same thing. Now the prom of this is quite substantial. Because it might be the division two, is the much riskier business line than division one, in which we should always measure the value of a project by discounting all the cash listed in the future. In discounting by a rate that reflects, the riskiness of the cash flows. So it could be the division two, the division two has a riskiness that suggest the required return should be 15%. In division one, is the less risk business line than the firm of average, in the required return may only be 9%, in our resuming that both this divisions are basically the same size, so we get the mixed overall cost capital for the firm to be 12%, an average of 9 and 15. So really if we are examing project, so we are doing project evaluation, in these two divisions, and if we have project that looks very much like division two, the same sort of risk. Then the discount rate we should be using for that project is 15%. Then you can see if we have a performance evaluation scheme that is based the corporations overall, cost capital, they will going to run into trouble. For example, if we use 12% to evaluate the project, in the division two¡¯s proposal, and suppose that project is, is a project that will return 14%, using 12% as a project looks good, it¡¯s got a positive net present value, if you use discount rate at 12%, the problem is the discount rate is not 12%, it¡¯s 15%, and the 15% is got a negative net present value. So you need to use a discount rate that is appropriate for the riskiness of the project in this case of 15%. The same thing goes to division one, suppose it is looking at a project that¡¯s got a 10% rate of return, and you discount the project with a 12% discount rate, you¡¯re going to get a negative net present value. Then the problem here is the discount rate is not 12%, the discount rate for this firm is 9%, that is the division of the firm. So the true present value is positive. So these two projects that I suggest, if we use the discount rate common across from a 12%, then we will accept a negative net present value project for division two, and we will reject a positive net present value for division one, it¡¯s not what we want to do to enhance our holder value. That the other thing is how we reward the managers in division two in division one, and it¡¯s really much linked to the project evaluation.

On Bernice-hxf
A lot of talk recently has been about the concept of economic evaluated, which is a trademark concept by Stern Steward Company. And basically, what they sell is the way to evaluate the divisions within the firm in terms of what they call economic evaluated, which really means what is added into share holder value. Let me go through the logic of what they suggest that you do in order to do an EBA analysis and this is just a sketch of what they suggest. Well, suppose we are looking at a corporation, and this corporation has got some overall weighted average cost capital that we can obtain these from the campaign. And suppose that cost capital is12%, and this corporation is got, suppose that it¡¯s got two different divisions, and there¡¯re different businesses lines. Now, one way to do performance evaluation would be to say well the hurtled rate for our company is 12%. So you¡¯d better make in division one, that at least 12% return on your investment, in order to enhance your holder value, in division two, you¡¯d better do the same thing. Now the prom of this is quite substantial. Because it might be the division two, is the much riskier business line than division one, in which we should always measure the value of a project by discounting all the cash listed in the future. In discounting by a rate that reflects, the riskiness of the cash flows. So it could be the division two, the division two has a riskiness that suggest the required return should be 15%. In division one, is the less risk business line than the firm of average, in the required return may only be 9%, in our resuming that both this divisions are basically the same size, so we get the mixed overall cost capital for the firm to be 12%, an average of 9 and 15. So really if we are examining project, so we are doing project evaluation, in these two divisions, and if we have project that looks very much like division two, the same sort of risk. Then the discount rate we should be using for that project is 15%. Then you can see if we have a performance evaluation scheme that is based the corporations overall, cost capital, they will going to run into trouble. For example, if we use 12% to evaluate the project, in the division two¡¯s proposal, and suppose that project is, is a project that will return 14%, using 12% as a project looks good, it¡¯s got a positive net present value, if you use discount rate at 12%, the problem is the discount rate is not 12%, it¡¯s 15%, and the 15% is got a negative net present value. So you need to use a discount rate that is appropriate for the riskiness of the project in this case of 15%. The same thing goes to division one, suppose it is looking at a project that¡¯s got a 10% rate of return, and you discount the project with a 12% discount rate, you¡¯re going to get a negative net present value. Then the problem here is the discount rate is not 12%, the discount rate for this firm is 9%, that is the division of the firm. So the true present value is positive. So these two projects that I suggest, if we use the discount rate common across from a 12%, then we will accept a negative net present value project for division two, and we will reject a positive net present value for division one, it¡¯s not what we want to do to enhance our holder value. That the other thing is how we reward the managers in division two in division one, and it¡¯s really much linked to the project evaluation.

On Bernice-hxf
A lot of talk recently has been about the concept of economic evaluated, which is a trademark concept by Stern Steward Company. And basically, what they sell is the way to evaluate the divisions within the firm in terms of what they call economic evaluated, which really means what is added into share holder value. Let me go through the logic of what they suggest that you do in order to do an EVA analysis and this is just a sketch of what they suggest. Well, suppose we are looking at a corporation, and this corporation has got some overall weighted average cost capital that we can obtain these from the campaign. And suppose that cost capital is12%, and this corporation is got, suppose that it¡¯s got two different divisions, and there¡¯re different businesses lines. Now, one way to do performance evaluation would be to say well the hurtled rate for our company is 12%. So you¡¯d better make in division one, that at least 12% return on your investment, in order to enhance your holder value, in division two, you¡¯d better do the same thing. Now the prom of this is quite substantial. Because it might be the division two, is the much riskier business line than division one, in which we should always measure the value of a project by discounting all the cash listed in the future. In discounting by a rate that reflects, the riskiness of the cash flows. So it could be the division two, the division two has a riskiness that suggest the required return should be 15%. In division one, is the less risk business line than the firm of average, in the required return may only be 9%, in our resuming that both this divisions are basically the same size, so we get the mixed overall cost capital for the firm to be 12%, an average of 9 and 15. So really if we are examining project, so we are doing project evaluation, in these two divisions, and if we have project that looks very much like division two, the same sort of risk. Then the discount rate we should be using for that project is 15%. Then you can see if we have a performance evaluation scheme that is based the corporations overall, cost capital, they will going to run into trouble. For example, if we use 12% to evaluate the project, in the division two¡¯s proposal, and suppose that project is, is a project that will return 14%, using 12% as a project looks good, it¡¯s got a positive net present value, if you use discount rate at 12%, the problem is the discount rate is not 12%, it¡¯s 15%, and the 15% is got a negative net present value. So you need to use a discount rate that is appropriate for the riskiness of the project in this case of 15%. The same thing goes to division one, suppose it is looking at a project that¡¯s got a 10% rate of return, and you discount the project with a 12% discount rate, you¡¯re going to get a negative net present value. Then the problem here is the discount rate is not 12%, the discount rate for this firm is 9%, that is the division of the firm. So the true present value is positive. So these two projects that I suggest, if we use the discount rate common across from a 12%, then we will accept a negative net present value project for division two, and we will reject a positive net present value for division one, it¡¯s not what we want to do to enhance our holder value. That the other thing is how we reward the managers in division two in division one, and it¡¯s really much linked to the project evaluation.


Home work
A lot of talk recently has been about the concept of economic value-added, which is trademark concept by Stern Stwed Company. In basically, what they sell is a way to evaluate the divisions with in the firm, in terms of what they call economic value-added, which really means what is added to share holder value. Let me go through the logic what they suggest that you do in order to do an EBA analysis. 
This is just a sketch of what they suggest. Well, suppose that we are looking at a corporation. And this corporation has got some overall weighted average cost capital, there we can obtain these from the campaign. And suppose that the cost capital is 12%, in this corporation they has got , um suppose it has got 2 different divisions, and there are different business lines. Now one way to do performance valuation, would be to say well, the ------- rate for our company is 12%. So you¡¯d better make in division one list 12% return on your investment, in order to enhance your holder done., in division 2 you¡¯d better do the same thing.
Now, a pron-----this is quite some stranger, because it might be that division 2 is much riskier business line than division 1.It should always measure the value of a project by discounting all of the cashless to the future. In this counting by a rate, have reflex the risky needs of cash lows. So It could be the division 2, the division 2 has a risky needs that suggest required return should be 15%. In division 1 is less risky business line than the firm of average, in the required return might only 9%. And I am assuming that both divisions are basically the same size show me get mixed overall cast capital for the firm to be 12%, an average of 9 and 15 
So really , if we were examining project, suppose doing project evaluation, in this two divisions, if we have project looks very much, like division 2, the same sort of risk, then the discounting that we should be using the project is 15%. You can see if we have a performance valuation skim that based on the corporation¡¯s overall cost capital that we going to run into trouble. For example, If we use 12% to valuate the project in division 2¡¯s of proposal, it suppose that project is a project will return 40%. Using 12%, this project looks good, it¡¯s got a positive net preset value., if it use the discount of 12%, the problem is the discount rate will not 12%, is 14%. In the 14% it¡¯s got negative net present value, so you need to use a discount rate that¡¯s appropriate for the risky needs of project in this case of project. The same thing goes in the division 1. Suppose it is looking at project, that¡¯s got 10%, uh, red return. And you discount the project with a12%, discount right, you gonna get a negative net represent value. The problem here is the discount rate is not 12%, the discount rate for this firm is 9%, that is the division of the firm. So the true present value is positive. So these two projects that I suggest, if you use the discount rate common across from a 12%, them we will accept a negative net present value project for division 2, and we will reject positive net present value for division one, that¡¯s not what we wanna do to enhance our holder value. That the other thing is that how we reward the managers in the division 2 in the vision 1, and it¡¯s very much linked to the project valuation.