Case Study: Living by Numbers – Value Creation or Profit?

QUESTION 1: DESCRIBE THE SITUATION

MarineCorp Sdn Bhd as a subsidiary of SURIA group had two subsidiaries, Green Port Bhd and Sungai Emas Port Sdn Bhd. On 27 December 2009, Hafiz Hashim (CFO of MarineCorp and both subsidiaries) reported to the company’s Board about the financial performance of the three companies for twelve months ending 31st December 2009. The President of SURIA wanted to apply Value-Based Management (VBM) for all the SURIA Group and all its subsidiaries and associated companies. Under VBM approach, performance of the company will be measured by economic earnings. Hafiz is in dilemma of whether to use the economics earnings method as required by SURIA group or profits method as practiced by MarineCorp to report the financial performance of three companies in the next board meetings. Hafiz also requested by the board to rank the three companies in terms of their financial performance, to identify a better performance indicator and to determine specific actions in improving company’s performance. He also faced the issues from the general managers of both subsidiaries on dredging maintenance costs and dividend payments.

The type of case is rule as Hafiz need to make the choice between two different methods which will result in different performance of these three companies by comparing the economics earnings method and profit-based method.

QUESTION 2: DETERMINE THE ECONOMIC EARNINGS OF MARINE CORP & ITS TWO SUBSIDIARIES

The formula for economic earnings is shown below:

Economic Earnings         =  NOPAT – Capital Charged

=  NOPAT – (WACC × Average Invested Capital)

where:

NOPAT = After tax profit or returns from the operating activities of the business

        WACC = Weighted Average Cost of Capital

        Invested capital = Investment in the business attributed to the investors

The economic earnings of MarineCorp Sdn Bhd and its two subsidiaries are as below:

1. MarineCorp Sdn Bhd:

Economic Earnings = RM15,128,917 – RM854,306

 = RM14,274,611

1. Green Port Sdn Bhd:

Economic Earnings = RM31,381,168 – RM45,969,400

 = - RM14,588,232

1. Sungai Emas Port Sdn Bhd:

Economic Earnings = RM5,218,364 – RM187,801

 = RM5,030,563

QUESTION 3: RANK THE FINANCIAL PERFORMANCE OF ALL THREE COMPANIES

Table below shows the economic earnings and profits of the three companies in year ended 2009:

Table below shows the ranking of the three companies in terms of the financial performance under economic earnings method and profit-based method.

The ranking of the financial performance of the companies varies according to the performance indicators that will be practiced by the companies in year 2009. Under the economic earnings method, MarineCorp Snd Bhd is on top while Green Port Sdn Bhd is on top according to profit-based method.