The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc. – Case Solution

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The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc. Case Answers

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1.) What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance?

EVA is the value created or destroyed each year by deducting a charge for capital from the firm’s net operating profit after taxes or best known NOPAT. The equation for EVA is:

EVA = Operating Profits – Capital Charge

EVA = NOPAT – (K*Capital)

NOPAT: net operating profit after taxes.

K: Cost of capital or WACC.

Capital: capital employed in the business or operation.

Advantages:

1. EVA gives the value a company generates above the required return on its capital, focusing on the creation of this value. This focus aligns management’s goals with shareholders’ interests by emphasizing long-term value creation.

2. EVA measures how the company is managing its capital investments, if the EVA is positive (EVA>0), this would mean that the company is creating value for the shareholders. This is a good reference for managers to know if they are doing a low-return project.

3. EVA is a measurement that can be used to see if value is created or destroyed inside a hole company, or a specific line of the business and inside a single project.

4. EVA considers both operating performance (NOPAT) and capital efficiency (Capital Charge), making it a more comprehensive measure than metrics like Net Income or Earnings per Share (EPS).

5. EVA can be used as a valuation method, by estimating the Market Value Added (MVA), following these equations:

MVA = Present Value of all future EVA

MVA = Market Value of debt and equity – Capital

Market Value = Capital + Present Value of all future EVA

Disadvantages:

1. There is a risk that managers might focus on short-term EVA improvement instead of a long-term strategy for the hole company, such as R&D or market expansion.

2. EVA is not an absolute measure for analyzing the health of a company, it may not be as effective in industries with significant intangible assets or those where capital investments are not very important. Sometimes having a low NOPAT does not mean that the company is not doing good, but that it is captured in the EVA.

3. When valuing a company through EVA it is difficult to calculate the terminal value of the company, which makes it an incomplete method.

2.) Analyze the historical performance of FedEx and United Parcel Service, Inc. in terms of EVA. What are the trends you see? What factors affect this trend? What do you think are the key drivers of EVA?

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