Page 69 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 2. Performance Measurements and Standards 55

• Economic profit equity adjusted (EPEA) This is net operating profit after tax
(see NOPAT definition) minus after-tax cost of debt plus a reasonable return on equi-
ty. It is also called economic profit modified. If this is positive, shareholder value is appre-
ciating beyond an expected return on investment. If it is negative, one must look to
economic profit refined (EPR) to see if any value is appreciating. If NOPAT is
$20,110,400, and after-tax cost of debt is $2,499,705 (see Return on capital definition)
with an expected 10 percent return on equity of $13,077,400 or $187,077,400 (Table
2-8), then EPEA is $3,902,955.
• Economic profit refined (EPR) This is NOPAT (see definition) minus the after-
tax interest on debt plus a comparable value for net assets and an appropriate return
on equity. By including net current assets, one has also charged it with their use,
assume 7 percent (see Net assets definition), or $21,512,036 on net assets of
$307,314,800. The formula would be $20,110,400 (NOPAT) [$2,499,705 (after-tax
debt cost) $21,512,036 (net asset charge) $3,902,915 (EPEA)] $7,804,296.
• Economic value added (EVA) This is another version of calculating economic
value (see EP, EPEA, and EPR). EVA has been trademarked by Stern, Stewart.
• Equity See Shareholder equity.
• Expense budget This is the allocation of dollars for business use, typically defined
by category (e.g., supplies, business travel, and executive incentive pay).
• Fixed assets to long-term debt ratio This is land plus buildings and equipment
divided by long-term debt. In the example, this is $124,045,900 (Table 2-6) divided by
$126,763,900 (Table 2-7), reflecting that fixed assets represent a ratio of 97.9 to 1 of
long-term debt.
• Fixed assets to sales ratio This is sales divided by fixed assets (land plus buildings and
equipment). In the example, this is $101,546,400 (Table 2-1) divided by $124,045,900
(Table 2-6), indicating that sales represent a ratio of 0.82 to 1 of fixed assets.
• Fixed assets to shareholder equity ratio This is fixed assets (land plus buildings,
and equipment) divided by shareholder equity. In the example, this is $124,045,900
(Table 2-6) divided by $137,077,400 (Table 2-8), indicating that fixed assets equal
90.5% of shareholder equity and represent a ratio of 0.91 to 1.
• Fixed assets to total assets ratio This is fixed assets (land plus buildings and equip-
ment) divided by total assets. In the example, this is $124,045,900 (Table 2-6) divided
by $330,997,900 (Table 2-6), indicating that a ratio of 0.38 to 1 of total assets are in
fixed assets.
• Fixed assets turnover This is net sales divided by land plus buildings and equipment.
In the example, this is $101,546,400 (Table 2-1) divided by $124,045,900, indicating
that sales are in a ratio of 0.82 to 1 of fixed assets.
• Goodwill This is the amount the purchase price of an acquired company exceeds its
market-adjusted net assets. It appears as an asset on the balance sheet ($89,836,800 in
Table 2-6) and is amortized (charged to the income statement) over a stated period of
time in accord with GAAP, currently up to 40 years, at the discretion of management.
Tax regulations differ. It appears as $2,624,800 in Table 2-1.