Postmodern Corporate Finance

Journal of Applied Corporate Finance, Vol. 22, No. 2, pp. 48-59, Spring 2010

14 Pages Posted: 16 Oct 2010

Date Written: October 14, 2010

Abstract

“Postmodern” corporate finance builds on the principles of modern corporate finance while restoring at least part of the emphasis on top-line growth that prevailed before the intense emphasis on returns on capital brought on by the ongoing shareholder value movement.

The vast majority of rate of return measures are based on conservative accounting and make old assets look better than new ones – stifling investments in growth. Gross Business Return is introduced as a return measure that correlates better with how valuation is actually reflected in the market and it is measured against a new Required Return framework that derives the level of current performance demanded by investors. Historical Required Return findings over time for the market and for specific industries are reviewed and interpreted, and it is demonstrated that the market appears to demand noticeably lower current returns than implied by traditional weighted average cost of capital approaches. This potentially has led executives to make suboptimal growth versus return tradeoffs. To help with such tradeoffs, a new measure of performance, Residual Cash Earnings, is introduced as a cash-based economic profit measure. Residual Cash Margin equals Residual Cash Earnings as a percent of revenue and as such it is effective for clarifying tradeoffs between growth and efficiency without the old versus new asset problems of most traditional return and economic profit measures. These new measures and analytical tools are suitable for strategic planning, budgeting, resource allocation, performance measurement, and rewards. Consistent application of these principles across these management processes provides a framework for constantly rebalancing the emphasis on growth and return to adapt to changes in the economy, industry, and competitive landscape.

Keywords: shareholder value, growth, return, required return, valuation, Residual Cash Earnings, Residual Cash Margin, Gross Business Return

JEL Classification: D81, G12, G31, M21

Suggested Citation

Milano, Gregory Vincent, Postmodern Corporate Finance (October 14, 2010). Journal of Applied Corporate Finance, Vol. 22, No. 2, pp. 48-59, Spring 2010, Available at SSRN: https://ssrn.com/abstract=1692001

Gregory Vincent Milano (Contact Author)

Fortuna Advisors LLC ( email )

822 N. A1A Highway
Suite 310
Ponte Vedra Beach, FL 32082
United States

HOME PAGE: http://www.fortuna-advisors.com

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