58. HELP # Solve Part B

Company information LOL Co is a chain of shops selling cards and gifts throughout its country. It has been listed on the stock exchange for 10 years and enjoys a fairly high profile in the retail sector of the national economy. Value-based management (VBM) You have been asked by the chief executive officer (CEO) to advise the company on VBM, as a different approach to performance management. The CEO has read about this method as a way of focusing on shareholder interests and in the current tough economic climate, she thinks that it may be a useful development for LOL. The company has traditionally used earnings per share (EPS) growth and share price in order to assess performance. The changes being proposed are considered significant and the CEO wants to be briefed on the implications of the new analysis and also how to convince both the board and the major investors of the benefits. LOL aims for a capital structure of 50:50 debt to equity. (a) Explain to the CEO what value-based management involves and how it can be used to focus the company on shareholder interests. (4 marks) (b) Perform an assessment of the financial performance of LOL using Economic Value Added (EVA rm ) and evaluate your results compared with those of earnings per share (EPS) growth and share price performance. You should state any assumptions made. (12 marks) (c) Evaluate VBM measures against traditional profit based measures of performance. (4 marks) (d) The CEO has also read how the use of net present values (NPV) can focus a company on increasing shareholder value. Discuss the relationship between EVA TM and NPV