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Rappaport (1998) coined shareholder value added (SVA) to refer to the increase in shareholder value over time. He defines shareholder value as the economic value of an investment, which can be calculated by using the cost of capital to discount future cash flows forecast (which he called free cash flows) into present values (discounted cash flow techniques are described in detail in Chapter 12). The business must generate profits in product markets that exceed the cost of capital in the capital market for value to be created (if not, shareholder value is eroded). Rappaport developed a shareholder value network (see Figure 2.2). Through this diagram, he identified seven drivers of shareholder value: sales growth rate, operating profit margin, income, tax rate, working capital investment, fixed capital investment, cost of capital and new duration.
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