Index
Numbers
influencing plan choices, 209-210
A
ABO (accumulated benefit obligation), 192
accounting for pension plans, 189
actuarial loss, net, 197
amortization of prior service costs, 197
DB (defined benefit) plan obligations, 189-192
expected return on plan assets, 197-198
pension footnotes, 193
post-retirement benefits, 194-195
service costs, 196
accounts receivable, 25
accounts receivable turnover ratio, 25
accumulated benefit obligation (ABO), 192
acquisition value, Monte Carlo simulations, 148-150
acquisitions
DCFs (discounted cash flows), 144-145
EPS (earnings per share), 235
Monte Carlo simulations, 150-151
actuarial loss, net, 197
Alcoa
disclosure of methods and assumptions they use to cost stock options, 174-176
pension trusts, 185
aligning pay with performance, 217-218
alternative calculation of ROI, 41
amortization of prior service costs, pension plans, 197
analysis, maximizing ROI (return on investment), 125-126
analyzing
DCFs (discounted cash flows), mergers and acquisitions, 144-145
annual cash, 10
annual reports, pension footnotes, 193
Apple, 157
ASC 17, 214
ASC 715, 193
asset turnover, common size financial statements, 51-52
asset values, balance sheets, 35
AT&T, 214
B
accounts receivable, 25
accounts receivable turnover ratio, 25
asset values, equity value, 35
book value versus market value of long-term assets, 35
financial ratios, 37
current assets to current liabilities, 38
inventory turnover ratio, 27
capital invested component of stockholders’ equity, 32-33
other comprehensive income, 33
retained earning component of stockholders equity, 33
property, plant, and equipment, 27-28
base costs, pension plans, 198-199
believing the numbers, balance sheets, 34-37
asset values, equity value, 35
benefit/cost analysis of turnover reduction programs, 116
binomial options pricing model, 176-175
Black, Fisher, 165
Black-Scholes model
dividend yield, 171
estimating cost of options granted, 165-168
exercise price, 170
forfeiture rates, 171
interest rates, 170
Johnson & Johnson, pricing employee stock options, 173-174
versus lattice models, 177-180
maturity, 170
stock price, 170
vesting periods, 171
Boeing, 158
bonds
choosing with IRR, 92
pricing 401(k)s with NPV, 90-91
bonuses, 153
book value versus market value of long-term assets, 35
branding, 57
breakeven levels
estimating NPV of new product introduction, 129-130
budgets, HR budget allocations, 122-123
when there are large alternatives, 104-107
Buffet, Warren, 164
business strategies, HR strategies and, 56-58
buy versus lease decisions, 82-83
C
calculating
cash flow, 44
CFROI (cash flow return on investment), 227
DB (defined benefit) plans, obligations of, 189-192
of a series of cash flows, 75-76
call options, 154
capital, working capital, 130
capital asset pricing model (CAPM), 62
capital budgeting, 69
capital charge, 229
reducing, WACC (weighted average cost of capital), 68
WACC (weighted average cost of capital), 69
capital expenditures, estimating NPV of new product introduction, 128-129
capital invested component of stockholders’ equity, 32-33
CAPM (capital asset pricing model), 62-63
cash balance plan (CBP), 187
calculating, 44
present value of a series of cash flows, 75-76
converting profits to, 130-131
decisions about overtime usage, 98-101
determining relevant cash flows, 83-85
dividing into initial time horizon and terminal value, 145
income statements, 45
using NPV and IRR to guide HR budget allocations, 101-104
cash flow return on investment (CFROI), 227-229
CBP (cash balance plan), 187
Center on Executive Compensation, 217-218, 236
CFROI (cash flow return on investment), 227-229
calculating, 227
Chrysler Corporation, bonuses, 79
commercial paper, 61
common shareholders, 60
common size financial statements, 50
profit margins, 51
return on assets, 51
common size income statements, 20
common stock, 60
comparing leavers and their replacements, 118-119
comparison groups, determining program impacts using pre-post changes, 111-112
compensation
aligning pay with performance, 217-218
EBIT (earnings before interest and taxes) versus net income, 219
EBIT versus EBIT per employee, 219
equity compensation, 159, 183-184
getting incentive levels just right, 236-238
profit per dollar of assets, 221-222
composition, of turnover, 117-118
converting profits to cash flows, 130-131
corporate profits, changes in pension assumptions, 204-205
corridor method, pension expense, 199-201
impact of WACC on value creation, 66-68
Monte Carlo simulations, 147
reducing WACC, 68
WACC, 69
cost of debt, 62
cost of goods sold, Home Depot, 12
cost-benefit analysis of training programs, 110
costs, reducing, 6
current assets to current liabilities, 38
D
DB (defined benefit) plans, 186, 211
accounting for, 189
calculating obligations, 189-192
freezing, 207
retirement, 213
transferring risk to employees, 206
transferring risk to insurance companies, 206-207
Verizon, 193
DC (defined contribution) plans, 186, 195, 211
influencing plan choices, 208-210
DCFs (discounted cash flows), 72-73
analyzing mergers and acquisitions, 144-145
examples, 77
determining relevant cash flows, 83-85
selecting discount rates, 85
using Excel’s NPV function to analyze a buy versus lease decision, 82-83
using spreadsheets to calculate present values, 80-82
deals, structuring with spreadsheets, 139-140
debt, cost of, 62
debt financing, 61
decision making, overtime, 98-101
deferred income tax entries, 30
deferred revenue, 30
Degussa Chemicals, 225
Delta Air Lines, 222
de-risking DB (defined benefit) plans, 205-206
Diluted Earnings Per Share, 17
disclosure, methods and assumptions used to price stock options, 172-173
discount rates
selecting, 85
discounted cash flow analysis, 71
discounted cash flows. See DCFs (discounted cash flows)
distribution, estimating around expected NPV, 137-138
dividend yield, Black-Scholes model, 171
dividing cash flows into initial time horizon and terminal values, 145
dollar value of program impacts, measuring, 113-114
E
earnings per share. See EPS (earnings per share)
EBIT (earnings before interest and taxes), 18
versus net income, 219
EBIT (earnings before interest and taxes) versus net income, versus EBIT per employee, 219
EBIT per employee, versus EBIT (earnings before interest and taxes) versus net income, 219
EBITDA (earnings before interest, taxes, depreciation, and amortization), 18-19
versus EBIT (earnings before interest and taxes), 220-221
financing costs, 22
economic margin (EM), 229
economic value added (EVA), 222-224
EM (economic margin), 229
employee preferences
Employee Retirement Income Security Act of 1974 (ERISA), 192
employees
improving ability to make pension plan choices, 210
transferring risk to, DB (defined benefit) plans, 206
EPS (earnings per share), 17, 233-234
impact of financial restructuring, 235-236
equipment, net present value, 120-122
equity
stockholders’ equity, on balance sheets, 31-32
equity compensation, 159, 183-184
equity financing, 60
equity value, balance sheets, 35
ERISA (Employee Retirement Income Security Act of 1974), 192
estimating
cost of options granted, Black-Scholes model, 165-168
expected NPV
based on judgments about likelihood of each scenario, 133-135
multiple NPVs with scenario analysis, 133
NPV of new product introduction, 128-129
capital expenditures and revenue forecasts, 128-129
converting profits back to cash flows, 130-131
should you introduce the new product, 131
variable costs and breakeven levels, 129-130
EVA (economic value added), 222-224
evaluating financial performance, risk, 238-239
Evonik Industries, 225
Excel
exchange traded options, 155-156
exercise price, Black-Scholes model, 170
expected NPV
estimating based on judgments about likelihood of each scenario, 133-135
estimating distribution, 137-138
expected return on plan assets, pension plans, 197-198
expenses, pension plans, 192-193
expensing stock options, 163-164
F
facilities, net present value, 120-122
FASB (Financial Accounting Standards), 163
FIFO (first-in, first-out), 26
Financial Accounting Standards Board (FASB), 163
financial leverage
increasing shareholders’ ROI, 38-40
reducing shareholders’ ROI, 39-40
financial performance, evaluating risk, 238-239
financial ratios, 37
alternative calculation of ROI, 41
current assets to current liabilities, 38
financial leverage
increasing shareholders’ ROI, 38-40
reducing shareholders’ ROI, 39-40
financial statements, 9-10, 49
common size financial statements, 50
profit margins, 51
return on assets, 51
financial leverage, impact of, 54-55
income statements. See income statements
financing costs, 22
first-in, first-out (FIFO), 26
Ford, transferring DB risk to employees, 206
forfeiture rates, Black-Scholes model, 171
freezing DB (defined benefit) plans, 207
G
Gayston Corp., 235
GE (General Electric)
relative TSR (total shareholder returns), 232
General Dynamics, 235
General Motors (GM), 60
transferring DB risk to employees, 206
transferring DB risk to insurance companies, 206-207
growth perpetuity, Monte Carlo simulations, 147-148
H
Home Depot
accounts receivable, 25
accounts receivable turnover ratio, 25
common size income statements, 20
current assets to current liabilities, 38
EBITDA (earnings before interest, taxes, depreciation, and amortization), 19
financial leverage, reducing shareholders’ ROI, 39-40
financing costs, 22
income statements, 11
cost of goods sold, 12
depreciation and amortization, 14-15
income taxes, 16
SG&A (Selling, General, and Administrative Expense), 13
inventory turnover ratio, 27
capital invested component of stockholders equity, 32-33
operating efficiency, 21
operating profit margin, 21
other comprehensive income, 33
property, plant, and equipment, 28
retained earning component of stockholders equity, 33
ROIC, 222
store growth, 21
year-over-year change, 22
Honeywell, 214
HR, role in value creation, 245
HR budget allocations
trade-offs, 125
when there are large alternatives, 104-107
HR costs, reducing, 6
HR initiatives, 107
cost-benefit analysis of training programs, 109
HRIS (human resource information system) software, choosing, 107-108
sunk costs, 109
HR strategies, business strategies and, 56-58
HRIS (human resource information system) software, choosing, 107-108
HRIS software, 107
Hull-White approach, 179
human resource information system, 107
I
IASB (International Accounting Standards Board), 214
IBM, 61
balance sheets, 37
identifying non-trainees, 113
IFRS (International Financial Reporting Standards), 35
impact of financial restructuring, EPS (earnings per share), 235-236
implications of pension plan design on HR, 211-212
incentives, getting just right, 236-238
cash flow, 45
common size income statements, 20
cost of goods sold, 12
Home Depot, 11
income taxes, 16
operating efficiency, 21
operating profit margin, 21
SG&A (Selling, General, and Administrative Expense), 12-13
store growth, 21
income taxes, 16
increasing shareholders’ ROI, financial leverage, 38-40
inefficiencies, reducing, 6
inflation, 86
influencing plan choices, DC (defined contribution) plans, 208-210
initial time horizon, dividing cash flows, 145
inputs, Black-Scholes model, 168-172
insurance companies, transferring risk to, DB (defined benefit) plans, 206-207
interest costs, pension plans, 196-197
interest rates, 86
Black-Scholes model, 170
DB (defined benefit) plans, 202-203
IRR (internal rate of return), 87
IRR reinvestment rate assumption, 92-94
payback periods, 94
using NPV to evaluate investments or projects, 86-87
using NPV to price the bonds in your 401(k), 90-91
International Accounting Standards Board (IASB), 214
International Financial Reporting Standards (IFRS), 35
interpreting output from Monte Carlo simulations, 142-143
intrinsic value of stock options, 154-155
inventory turnover ratio, 27
investments
facilities and equipment, net present value, 120-122
IRR (internal rate of return), 87
choosing bonds, 92
HR budget allocations, 101-104
HRIS software, 108
reinvestment rate assumption, 92-94
J-K-L
Jensen, Michael C., 153
Johnson & Johnson, 155
Black-Scholes model, pricing employee stock options, 173-174
Kaiser Aluminum Corp., 225
lattice models
versus Black-Scholes model, 177-180
disclosure of methods and assumptions they use to cost stock options, Alcoa, 174-176
lease versus buy decisions, 82-83
liabilities, 23
capital invested component of stockholders’ equity, 32-33
other comprehensive income, 33
retained earning component of stockholders’ equity, 33
LIFO (last-in, first-out), 26-27
limitations of EVA (economic value added), 226-227
Lockheed Martin, pension trusts, 185
long-term measures of value creation, 242-243
Lowe’s
common size income statements, 20
financing costs, 22
operating efficiency, 21
operating profit margin, 21
store growth, 21
year-over-year change, 22
M
MacDonald, J. Randall, 214
maintenance costs, 85
market value added (MVA), 230
market value of long-term assets versus book value, 35
maturity, Black-Scholes model, 170
maximizing ROI (return on investment) on your analysis efforts, 125-126
measuring dollar value of program impacts, 113-114
mergers
DCFs (discounted cash flows), 144-145
Monte Carlo simulations, 150-151
Merton, Robert, 168
metrics, value creation, 243-245
models, estimating NPV of new product introduction, 131-133
Monte Carlo simulations, 141-142
cost of capital, 147
determining value of stock options, 180-181
interpreting output from, 142-143
present value of a no-growth perpetuity, 147
MSN Money, 37
Murphy, Kevin J., 153
MVA (market value added), 230
N
versus EBIT (earnings before interest and taxes), 219
net present value of investments involving facilities and equipment, 120-122
new product introduction, estimating NPV, 128-129
capital expenditures and revenue forecasts, 128-129
converting profits back to cash flows, 130-131
variable costs and breakeven levels, 129-130
no-growth perpetuity, Monte Carlo simulations, 147
non-trainees, identifying, 113
NPV (net present value)
allocating HR budgets, 104-107
estimating expected NPV, based on judgments about likelihood of each scenario, 133-135
estimating multiple NPVs with scenario analysis, 133
estimating strategic initiative of new product introduction, 128-129
capital expenditures and revenue forecasts, 128-129
converting profits back to cash flows, 130-131
should you introduce the new product, 131
variable costs and breakeven levels, 129-130
evaluating investments or projects, 86-87
expected NPV
estimating distribution, 137-138
HR budget allocations, 101-104
HRIS software, 108
pricing bonds in 401(k)s, 90-91
O
OPAC (operating profit after capital charge), 223
operating efficiency, 21
operating profit, 221
operating profit after capital charge (OPAC), 223
operating profit margin, 21
optimizing HR budget allocations, 124-125
options
estimating cost of options granted, Black-Scholes model, 165-168
risk, 157
versus stock, employee preferences, 160-161
other comprehensive income, 33
P
pay, aligning with performance, 217-218
payback periods, interest rates, 94
PBGC (Pension Benefit Guarantee Corporation), 192
PBO (projected benefit obligation), 192
P/E (Price/Earnings) ratio, 233-234
pension accounting, 189
calculating DB plan obligations, 189-192
Pension Benefit Guarantee Corporation (PBGC), 192
pension expense, corridor method, 199-201
pension footnotes, annual reports, 193
pension plans, 185
accounting for
actuarial loss, net, 197
amortization of prior service costs, 197
expected return on plan assets, 197-198
pension footnotes, 193
post-retirement benefits, 194-195
service costs, 196
changes in pension assumptions, effect on corporate profits, 204-205
DB (defined benefit) plans, 186
freezing pension plans, 207
retirement, 213
transferring risk to employees, 206
transferring risk to insurance companies, 206-207
DC (defined contribution) plans, 186, 207-208
influencing plan choices, 208-210
de-risking DB (defined benefit) plans, 205-206
HR implications of plan design, 211-212
improving employees’ ability to make their own choices, 210
shifting from DB plans to DC plans, 187-188
underfunded pensions, 201
pension trusts, 185
perfect storms, DB (defined benefit) plans, 200-201
performance
short-term performance metrics, 240
performance share unit (PSU), 183
performance shares, 183
Pfizer, Inc, SG&A (Selling, General, and Administrative Expense), 13
planning tools, breakeven levels as, 114-115
post-retirement benefits, 194-195
preferred stock, 60
premiums, 154
pre-post changes, determining program impacts, 111
present value tables, reading, 73
present values
of a series of cash flows, 75-76
DCFs (discounted cash flows), 72-73
pricing bonds in 401(k)s with NPV, 90-91
productivity, training programs that don’t increase productivity, 115-116
profit, 17
EBIT (earnings before interest and taxes), 18
EBITDA (earnings before interest, taxes, depreciation, and amortization), 18-19
EVA (economic value added), 222-224
net income, 19
operating profit, 221
profit margins, common size financial statements, 51
profit maximization, 218
profit per dollar of assets, ROA and ROIC, 221-222
profits, converting profits back to cash flows, 130-131
program impacts
determining using comparison groups, 111-112
determining using pre-post changes, 111
measuring dollar value of, 113-114
projected benefit obligation (PBO), 192
projects, evaluating with NPV, 86-87
property, plant and equipment, 27-28
PSU (performance share unit), 183, 238
Q-R
quants, 5
R&D (research and development), 226
reading present value tables, 73
reducing
HR costs, 6
inefficiencies, 6
WACC (weighted average cost of capital), 68
relative TSR (total shareholder returns), 232-233
restricted stock, 182
restricted stock unit (RSU), 182
retained earning component of stockholders’ equity, 33
retirement, DB (defined benefit) plans, 213
return on assets. See ROA
revenue forecasts, estimating NPV of new product introduction, 128-129
evaluating financial performance, 238-239
options, 157
reducing on DB (defined benefit) plans, 205-206
transferring to employees, DB (defined benefit) plans, 206
transferring to insurance companies, DB (defined benefit) plans, 206-207
ROA (return on assets), 52
common size financial statements, 51
profit per dollar of assets, 221-222
Roche Pharmaceuticals, 223
ROE (return on equity), 53-54, 224
ROI (return on investment), maximizing on your analysis efforts, 125-126
ROI, alternative calculation of ROI, 41
ROIC (return on invested capital), 240
compared to WACC, 222
profit per dollar of assets, 221-222
RSU (restricted stock unit), 182
S
SAR (stock appreciation rights), 182
scenario analysis, estimating multiple NPVs, 133
Scholes, Myron, 165
selecting discount rates, 85
service costs, pension plans, 196
SG&A (Selling, General, and Administrative Expense), 12-13
short-term performance metrics, 240
skill sets, 4
Solver function, 105
spreadsheets
calculating present values, 80-82
for structuring deals, 139-140
stock
common stock, 60
preferred stock, 60
restricted stock, 182
stock appreciation rights (SAR), 182
disclosure of methods and assumptions they use to cost stock options, 172-173
versus exchange traded options, 158-159
how they work, 154
stock price, Black-Scholes model, 170
store growth, 21
straddles, 158
structuring deals with spreadsheets, 139-140
sunk costs, HR initiatives, 109
T
terminal values, dividing cash flows, 145
DCFs (discounted cash flows), 78-80
interest rates, 86
IRR (internal rate of return), 87
IRR reinvestment rate assumption, 92-94
payback periods, 94
using NPV to price the bonds in your 401(k), 90-91
time value of stock options, 154-155
total shareholder returns (TSR), 231-232
trade-offs, among HR budget components, 125
training programs, 102-103, 123
cost-benefit analysis of, 110
determining program impacts using comparison groups, 111-112
determining program impacts using pre-post changes, 111
that don’t increase productivity, 115-116
what if everybody gets training, 113
transferring risk to employees, DB (defined benefit) plans, 206
TSR (total shareholder return), 231-232
turnover
comparing leavers and their replacements, 118-119
turnover reduction programs, benefit/cost analysis, 116
U-V
underfunded pensions, 201
UPS, 214
U.S. GAAP, 214
HR’s role in, 245
impact of WACC on value creation, 66-68
long-term measures of, 242-243
value of stock options, determining with Monte Carlo simulation, 180-181
variable costs, estimating NPV of new product introduction, 129-130
VBO (vested benefit obligation), 192
Verizon
changes in pension assumptions, effect on corporate profits, 204-205
DB (defined benefit) plans, 193
pension expense, income statements, 195-196
pension footnotes, annual reports, 193
pension plans, base costs, 198
post-retirement benefits, 194-195
vested benefit obligation (VBO), 192
vesting periods, Black-Scholes model, 171
volatility, 64
W
WACC (weighted average cost of capital), 61, 85
compared to ROIC, 222
impact on value creation, 66-68
reducing, 68
Wal-Mart Stores, Inc., 55
weighted average cost of capital (WACC), 61
workforce value, 6
working capital, 130
X-Y-Z
year-over-year change, 22