Total return

Internal Return Rate. Another rate criterion, the internal return rate (IRR) or discounted cash flow rate of return (DCERR), is a popular ranking criterion for profitabiUty. The IRR is the annual discounting rate that makes the algebraic sum of the discounted annual cash flows equal to zero or, more simply, it is the total return rate at the poiat of vanishing profitabiUty. This is determined iteratively. 

The total annual return rate on investment is the sum of both the capital cost rate, ie, discount rate, and the net return rate (NRR). Any given numerical value can represent a low capital cost rate and a high net return rate, or a high capital cost rate and a low net return rate. The IRR, as the discounting rate that gives a vanishing net return, cannot be related to the total return rate at appropriate discount rates because of the nonlinear nature of the discounting step. 

Profitability Diag rams. Profitabihty diagrams of the type shown in Figure 3a for Venture A provide insight into venture profitabihty. Total return rate is defined as the sum of the discount rate and the net return rate (NRR). The discount rate, net return rate, and total return rate are all shown on the diagram as functions of the discount rate. Because the NPV is a nonlinear function of the discount rate, the NRR and total return rate are also nonlinear. The NRR, as a measure of the profitabihty, correctly decreases as the discount rate increases. 

The internal return rate (IRR), a fixed point on the diagram, caimot be viewed as a measure of profitabihty, which should vary with the cost of capital (discount rate). Because the curvature of the total return curve caimot be predicted from the single IRR point, there is no way that the IRR can be correlated with profitabihty at meaningful discount rates. Even both end points, ie, the IRR and the total return at zero discount rate, are not enough to predict the curvature of the total return curve. 

Fig. 4. Effect of NPV on profitabihty where investment and lifetime are the same for all Ventures (see Table 4). (a) Sale revenues for Ventures B and C have been selected so that at a discount rate of 10% per year Ventures A, B, and C each have the same NPV and NRR. IRR values are as given and do not relate to NPV, NRR, or total return rate (TRR). The diagram indicates that at discount rates less than 10%, Venture C has the largest NRR, but the IRR indicates Venture B is the choice for all discount rates, (b) Sale revenues for Ventures D and E have been selected so that Ventures A, D, and E each have a different NPV at a discount rate of 10% per year, but all three have the same IRR. The diagram indicates that at the selected discount rate of 10%, the...

In these types of problems, be careful to pay attention to what is being asked for sometimes the interest is requested, but other times the total return is wanted. 

Tyrone purchased a certificate of deposit for 500.00 and it matured in 7 years, 6 months. If after the maturity time Tyrone was given 837.50 as his total return, what was the percent interest rate, assuming a simple interest formula ... 

Firms that were unable to meet the requirements of the 4+2 formula dramatically increased their chances of failure and the differences in financial performance among these firms were remarkable. Winners produced total returns to shareholders (TRS) of 945% over the ten-year period of the study, whereas Tosers were only able to grow TRS 62%. Sales rose 415% for Winners, but only 83% for Losers. Similar results held for operating income. 

The same Australian study estimated total farm incomes under the assumption of an adoption rate of 30%. Under the worst-case scenario, where premiums for crops were assumed to decrease from 15% to 0% with no premiums for livestock products at all stages (extreme assumptions) total returns to the sector would drop by 7% when 30% of farmers had converted. In the best-case scenario, with premiums decreasing from 15% to 7.5% (probably more realistic), total returns to the cereal-livestock sector would have a 3% decrease at the 30% adoption rate. 

The exact values for the annualized Total Return to Shareholders are 12.9 percent for the chemical industry and 13.8 percent for the US market from 1980 until November 2004 (Source Thomson Financial). 

We therefore chose to examine the performance of chemical companies in relation to some easily measurable dimensions of their corporate activity - such as product portfolio, scale, geography, market position, and product focus. By classifying companies this way, we were able to test a number of hypotheses about what drives the creation of value, measured by total return to shareholders (TRS), market-to-book value, and pre-tax return on invested capital (ROIC). Data from the last full commodity cycle (1992 to 2003) generated surprising insights.5 ... 

Median total return to Median Median ROIC before... 

The first finding for the commodity segment is that size does matter. Larger companies had less cyclical (though not higher) returns on invested capital, and the less cydical returns correlated, albeit mildly, with higher total returns to shareholders. These companies were not only able to cut their production costs, but also had suffidendy diversified offerings - and therefore sufficiently stable cash flows - to weather cycles for individual products. 

Diversified companies presented a much more puzzling picture during the last cycle. In terms of total return to shareholders, surprisingly, diversified chemical companies performed best among the industry subgroups from 1992 onwards. 

In terms of total returns to shareholders (TRS), too, the chemical industry has proved its staying power in recent years. Although it suffered badly during the Asian crisis, and the ensuing technology and Internet bubble at the end of the twentieth century did not bolster chemical stocks and at the same time lured investors away from more traditional plays, the new millennium has seen the chemical industry continuing to deliver TRS that is almost in line with the market (Fig. 5.1). 

Taken together, these transactions confirm that chemical LBOs in Europe have been successful. Estimates suggest that the total returns after realizing the investments will be viewed as positive by investors in private equity funds. 

The only company to stay on BusinessWeek magazine s annual ranking of the top 50 performers in the Standard Poor s 500 index (based on sales growth, earnings growth, total return, and other bottom-line considerations) every year for the first six years running since the list began in 1997. 

But the decision not to build or repair in 1968 also affects the return in 1970-71, for it specifies that the plant in 1970 will have been built in 1962 and last overhauled in 1964. Thus the optimal 1970 decision build, resulting from the 1968 decision continue, will give a 1970-71 return of /j( 62, 64), which from Table VIII is 80. The total return for the last two time periods (four years), which we shall denote as P2( 62, 64), is therefore... 

As a result of this decision, the plant entering the period 1970-71 will have tb = 62 and tT advanced to 68. The optimal thing to do in 1970 will be either to continue operating or to build a new plant, for as Table VIII shows, either of these actions will bring a return of 80 for 1970-71. The total return r2 ( 62, 64) obtained from a repair in 1968 and the resulting optimal decision in 1970 will be... 

TotalFinaElf 6, 24 Trade patterns 4, 39 Trading chemical contracts 32 Transfer of skills, 179 Transfer of technology 179 Transitional challenges, 90-92 Transnational organization 122 TRS. see Total Return to Shareholders... 

The market s predictions on whether mergers and acquisitions will be successful are based on wild guesswork. In fact, the reverse is true. Empirical evidence shows that the expected value creation of a merger (as measured by the Total Return to Shareholders (TRS) of the relevant companies in the period from five days before the announcement of the deal to five days after) correlates strongly with the actual value realized, as measured by the TRS of the relevant companies over a period of several years, discounting the value creation of the market as a whole over the same period. 

The Total Return to Shareholders for a particular period can be broken down into three main elements ... 

As a result, the stock market performance of specialty chemical companies has lagged behind that of earlier periods. In fact, very few specialty chemical companies have done well over the last five years, as measured by their total return to shareholders or their market-to-book ratio, and very few have outperformed the pack in that period. This, in turn, has led to slower share price growth for the industry as a whole relative to broader market indices (Figs. 5.2-5.4). 

Value creation can be estimated by the development of the total return to shareholders, in terms of both the immediate reaction of shareholders in the first 5 days after the announcement and the long term development of a stock 2 to 3 years after integration. The first of these mirrors the financial markets expecta-... 

Change in total return to shareholders relative to index two to three years before and after announcement of the merger change in TRS performance five days before and after announcement of the merger Source McKinsey... 

Guided by analysts, and for all the reasons outlined above, investors in chemical industry stocks are wary of companies with highly cyclical earnings. Not only is cyclicality perceived to be difficult to manage, and therefore risky cyclical chemical companies are also viewed as dehvering lower total returns than non-cyclical... 

The results were revealing. We found that there is no statistically significant difference between the performance of more cycHcal and less cyclical companies either in terms of total returns to shareholders or ratio of market value to invested capital (Fig. 16.8). 

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