Department

Economics, Finance and Quantitative Analysis

Document Type

Article

Publication Date

Winter 2004

Abstract

Value-based management systems focus on wealth and the wealth creation process and promote the generation of value for the shareholders. A valuation model for the firm is extended analytically to focus explicitly on profitability, growth, and capital intensity as drivers of the value of the firm. The extended model provides information about the sensitivities of the value of the firm to changes in the firm's profitability, growth, and capital intensity. These sensitivities are presented in terms of changes per dollar of sales and actual dollar changes. The changes per dollar of sales show the relative sensitivities of the changes in the value of the firm resulting from changes in the measures for profitability, growth, and capital intensity. Each dollar amount shows the total dollar changes in the value of the firm resulting from changes in the profitability, growth, and capital intensity measures. These sensitivities show the impact of changes in the profitability, growth, and capital intensity measures on the value of the firm. This information is valuable in helping managers determine a desired course of action to improve the wealth generating ability of the firm by managing these value drivers more effectively.

Journal

Journal of Accounting & Finance Research

Journal ISSN

1093-5770

Volume

12

Issue

6

First Page

70

Last Page

79

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