Measuring And Controling Value Created In Endesa

1. Refer to ENDESAÐŽ¦s current business strategy. In what primary economic activity is ENDESA engaged? (HINT: the primary economic activity is not the generation and sale of electricity or related activities). Why is it necessary to understand the strategy and primary economic activity in order to manage ENDESAÐŽ¦s financial activities?

Managers should ensure that selected performance measurement system fits the unique requirements and business strategy of the firm. In general, primary economic activity of the company and its performance focus should dictate the selection of performance measurement model.

ENDESA strategy is ÐŽ§one of acquiring business units, using its expertise to develop as much value in the unit as possible and then to hold or sell the unit depending on its EVC potential.ЎЁ Primary economic activity of ENDESA is oriented towards geographic diversification (diversified market expansion) and diversified portfolio of business activities. The company follows a clear strategy of holding and developing units with high or potentially high EVC and selling those with low potential EVC. The desired focus of ENDESA is the interrelationship between managers and shareholders and each business unit is hold responsible for driving value.

2. Why does EVC as computed by ENDESA reflect an economic rather than an accounting perspective? What are the advantages and disadvantages of using a cash flow perspective vs. an accounting perspective for financial management tools?

A key difference between accounting and economic principles is based on assumption that revenues of a profitable company:

„П must cover both production and operating expenses of business activities

„П must provide a return on the invested capital that exceeds the opportunity cost of capital.

Economic value created (EVC) is becoming increasingly important especially for companies whose intangible assets are predominantly funded by shareholderÐŽ¦s equity. It ensures a greater degree of integration between shareholder, corporate and employee profit. Economic value added (EVA) can be perceived as ÐŽ§after-tax cash flow generated by a business minus the cost of the capital used to generate that cash flowЎЁ. After subtracting all economic costs from operating profits after taxes EVA reveals the true economic surplus available for further investment. Traditional cash flow analysis can easily disregard companies with negative cash flows because