I. Maximizing corporate profits is the basis for maximizing shareholder wealth, but maximizing corporate profits is not the same as maximizing shareholder wealth. Before understanding the relationship between the two, you need to understand two basic financial concepts: Netprofit net profit, EVA (EconomicValueAdded) economic value added. NetProfit can be understood as a measure of corporate profit. EVA can be understood as a measure of shareholder wealth. the larger the Netprofit, the larger the corporate profit. the larger the EVA, the larger the shareholder wealth. netprofit=operating profit-interest expense-income tax. The basis of dividend distribution to shareholders is net profit after interest and tax.

Second, intuitively, we will think that the higher the Netprofit, the enterprise profit is the largest, can be distributed to the shareholders of the higher dividends, the shareholders of the wealth is also the greater. The biggest drawback of Netprofit is that it does not take into account the cost of capital for shareholders. The biggest drawback of Netprofit is that it does not take into account the cost of capital to the shareholders, and it is impossible for shareholders to make investment decisions without weighing the cost of their capital investment. Therefore, NetProfit is not an appropriate measure of shareholder wealth.

The Coca-Cola Company adopted EVA as one of its internal management tools at an early stage, and combined with the Balanced Scorecard, Coca-Cola has built a whole set of management logic system based on EVA as the basis of value creation assessment and the Balanced Scorecard as the assessment index of KPIs.

EVA=Net Operating Profit After Tax - Capital Total Cost=Net Operating Profit After Tax - Capital×CapitalCharge rate that is: EVA=NOPAT-CapitalChargeNOPAT CalculationCommonly used NOPAT calculation method in ACCA: PAT+aftertaxinterest=NOPATOperatingProfit- taxchargeadjustedtoexcludetaxreliefoninterest=NOPATThe essence of the two algorithms is the same, in these two calculation methods, the difficulty of understanding is: interest made a tax rate adjustment.

Three, that is, the net profit after tax is reduced to net profit after tax without interest. In other words, NOPAT is the net profit after tax without considering the cost of debt and the cost of shareholders' capital. Netprofit is the net profit after tax that takes into account the cost of debt and does not take into account the cost of shareholders' capital.Calculation of CapitalChargeThe most important thing to do when calculating capitalcharge is to calculate the cost of capital rate, i.e., WACC (weightedveragecostofcapital).WACC is supposed to be the rate of the cost of capital in the capital market and the cost of shareholders' capital in the market. market the weighted average of the rate of cost of debt and the rate of shareholders' capital.

Four, WACC is actually an indicator of the opportunity cost of shareholder investment. For example, you currently have 100 million dollars, you can choose to lend money to obtain interest; you can also choose to invest, to obtain dividends and investment transfer income; you can also make a portfolio. For you, when you choose an investment program, you give up another investment program to bring you the potential benefits, therefore, this potential gain is the opportunity cost of your investment in the current program. Only when the return on the investment program you choose is greater than the return on the investment program you gave up, you can really get wealth appreciation. If the return on the investment option you chose is lower than the return on the investment option you abandoned, your wealth is shrinking, even if you have book returns. Therefore, WACC is the opportunity cost measure of investment return. if EVA is greater than zero, wealth is increasing, if EVA is less than zero, wealth is shrinking. The goal of maximizing shareholder wealth is to maximize EVA.EVA maximization, in addition to maximizing corporate profits, but also to reduce capital investment, reduce the cost of capital rate.2017, Coca-Cola sold its bottling business in China to COFCO and Swire, which is based on the EVA shareholders to maximize the wealth of the decision made.