Question

1) Management consultants (McKinsey, Accenture, etc.) are generally hired to increase the intrinsic value of the firm. List the critical two elements—with direction—of the value maximization template on which a consultant may focus to accomplish this task, outlining in turn two generalized examples of potential actionable recommendations for each of the elements.

Answer 1

To maximize value of a firm, following two are the key elements on which a consultant would focus:

a) Profitability- It is very much a factor for valuin a firm. Particularly it is important to see whether the firm is able to generate returns for the equity holders. ROE(Return on equity) in which we calculate ratio of profit available to equity shareholders as against the net worth of a firm gives an idea about profitability.

b) Growth- Without growth a firm cannot enhance its value. Growth can be measured in terms of increase in revenue. This should be sustained year after year. A firm having constant growth of revenue will be much more valuable than firms which occassionally show growth.

Thus, a high return on equity and a constant growth in revenue will boost eanings of the firm which in turn will increase the stock price and hence valuation will be high for such a firm.