The basic franchise factor model (Leibowitz and Kogelman) decomposes a company's theoretical value, P, as follows:
where E = current normalized earnings k = the cost of capital r = the ROE on existing lines of business R = the ROE on new initiatives
G = the ratio of new capital investment (in present value terms) to
In Equation 7A.1, the first term, E/k, is the tangible value and the second term, [(R - k)/rk]GE, is the franchise value.
For the reader to appreciate the differential effects of the three types of employee claims (on current, net franchise, and gross franchise earnings), a discussion of how each acts independently to reduce firm value will be helpful. The effects are displayed separately in Figure 7A.1. (For Figure 7A.1, as in Figure 7.1, k = r = 12 percent and R = 18 percent.) By varying G, we can span a range of P/E values. For example, with G = 4.0, we obtain
current book value
Thus, the company's value prior to any franchise labor claim would be P = 8.33E + 16.67E = 25E. Now, if we assume that a 10 percent claim is exercised only against the current earnings (i.e., the first term in Equation
7A.1), then the reduced value becomes P(L1 = 10 percent) and the percentage reduction, Z(L1 = 10 percent), is z(L = 10%) = P - P(Llp _ 10%)
To generalize this result, let P(L1) be the value resulting from an L1 claim on current earnings; then,
k kr with the resulting percentage reduction
Was this article helpful?
Post a comment