apr-11.pdf (2.07 MB) - Crown Ownership Monitoring Unit

Key assumptions and features of the Ernst & Young economic profitmethodology• Based on publicly available data.• Built around a simple EP formula of: Economic Profit = Opening Invested Capital* (ROIC – WACC), where Opening Invested Capital equals the sum of• shareholders’ equity• net interest-bearing debt• revaluation gains on fixed assets (EY also undertook an analysis excludingrevaluation gains and losses, see below)• less: capital work in progress, financial assets held for sale, minority interestsand investments not deemed as integral to operations.• ROIC is calculated by dividing NOPAT by the Opening Invested Capital. Keycomponents and assumptions around NOPAT include:• operating profits defined as EBIT adjusted for revaluation gains or losses(smoothed), with adjustments to maintain consistency with Opening InvestedCapital• standardised treatment of tax, and• fair value movements are generally ignored (some exceptions).• WACC is based on the simplified Brennan-Lally model, with key parameters asfollows:• one-year WACCs, including one-year risk-free rate• same Asset Beta applied over the whole period, and• market risk premium of 7.5%.• A peer analysis for each of the SOEs, generating comparable ROICs.• A parallel assessment has been undertaken whereby NOPAT is calculated bothinclusive and exclusive of the effects of (smoothed) revaluation gains/losses (withconsistent adjustments to invested capital applied).• SOEs have been given the opportunity to provide feedback, but an intensiveconsultation process has not been entered into.• The EP model has been developed in the context of the Treasury undertakinganalyses with parallel metrics such as Total Shareholder Return and Market Valueassessments.page | 37