Technische Universität München
Handout Problem Set 8:
Case Study
”Vyaderm Pharmaceuticals“
Lehrstuhl für Controlling
Prof. Dr. Gunther Friedl
Email for questions and comments: peter.schaefer@tum.de

Technische Universität München
Question 16: Implementing EVA
Q16.1: Why has it been decided to implement EVA?
Handout Problem Set 8: Case Study 2
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
What is an EVA center? Why does the company reduce the number of EVA centers but not down to a single
EVA center?
Handout Problem Set 8: Case Study 3
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
What is the purpose of the bonus bank?
Handout Problem Set 8: Case Study 4
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Discuss the problems occurring in the first year of the implementation of the bonus system.
Handout Problem Set 8: Case Study 5
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Discuss the problems occurring in the first year of the implementation of the bonus system.
Handout Problem Set 8: Case Study 6
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
($ 000s except bonus)
Divisional EVA Calculation:
Actual EVA
EVA Improvement Goal
EVA Target
EVA Interval
Profit & Loss:
Income before following items:
Research & Development Expense
Consumer Advertising Expense
Goodwill Amortization
Net Income Before Tax
Current Years Income Tax Payments
Balance Sheet:
Net Operating Assets
From Footnotes:
Accumulated Goodwill Amortization
Capital Charge for EVA Purposes
Divisional Manager's Bonus:
Base Salary
Bonus Target
Bonus Payout
1996 1997 1998
Exihibt 8 from Case (p. 15). Assume all-equity financing (no interest expenses).
Handout Problem Set 8: Case Study 7
1999
2,920
2000
???
2,150
5,070
12,000
24,694 31,512 36,584 42,545 92,550
12,487 14,610 17,094 20,000 39,000
34 38 41 45 50
- 2,500 2,500 2,500 2,500
12,173 14,364 16,949 20,000 51,000
(4,260) (5,902) (6,807) (7,875) (18,725)
66,949 79,000 93,220 110,000 135,000
$ - 2,500 5,000 7,500 10,000
11 %
$ 200,000 $ 200,000
n. a.
$ 60,000
60 %
???
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.1: Calculate 2000 EVA and expected 2001 EVA for the North American Dermatology division.
R&D Adjustment to NOPAT
2000 and NOPAT
2001
($000s), rounded
1995 1996 1997
R&D expense
10,673 12,487 14,610
1998
17,094
1999
20,000
2000
39,000
2001
27,378
Amortization
1995
Adj. to NOPAT
2000
:
... 1996
... 1997
... 1998
... 1999
... 2000
… 2001
Handout Problem Set 8: Case Study 8
Adj. to NOPAT
2001
:
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.1: Calculate 2000 EVA and expected 2001 EVA for the North American Dermatology division.
R&D Adjustment to Invested Capital
2001
:
R&D Adjustment to Invested Capital
2000
:
R&D Adjustment to Invested Capital
1999
:
Handout Problem Set 8: Case Study 9
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.1: Calculate 2000 EVA and expected 2001 EVA for the North American Dermatology division.
Consumer Advertising Adjustment to NOPAT
2000, 2001
and Invested Capital
2001, 2000, 1999
:
($000s), rounded
Advertising expense
Amortization
1996
... 1997
1996 1997 1998 1999 2000 2001
34 38 41 45 50 55
Adj. to NOPAT
2000
:
Adj. to NOPAT
2001
:
Adj. to Invested Capital
2001
:
... 1998
... 1999
... 2000
… 2001
Adj. to Invested Capital
2000
:
Adj. to Invested Capital
1999
:
Handout Problem Set 8: Case Study 10
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.1: Calculate 2000 EVA and expected 2001 EVA for the North American Dermatology division.
Goodwill Adjustment to NOPAT
2000, 2001
and Invested Capital
2001, 2000, 1999
:
Adj. to NOPAT
2000
: Adj. to Invested Capital
2001
:
Adj. to NOPAT
2001
:
Handout Problem Set 8: Case Study 11
Adj. to Invested Capital
2000
:
Adj. to Invested Capital
1999
:
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.1: Calculate 2000 EVA and expected 2001 EVA for the North American Dermatology division.
Summary of Adjustments to Invested Capital
2001, 2000, 1999
and Averaging:
1999 2000 2001 (in $000s)
Net operating assets (NOA)
R&D adjustment
Consumer advertising adjustment
Goodwill adjustment
Invested Capital adj .
=> Average adjusted Invested Capital
2001
:
=> Average adjusted Invested Capital
2000
:
Handout Problem Set 8: Case Study 12
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.1: Calculate 2000 EVA and expected 2001 EVA for the North American Dermatology division.
Summary of Adjustments to NOPAT
2000,2001
and EVA Calculation:
2000 2001 (in $000s)
Net (Operating) Income before Tax
Taxes
NOPAT unadj .
R&D adjustment
Consumer advertising adjustment
Goodwill adjustment
NOPAT adj.
Capital Charges
EVA
Handout Problem Set 8: Case Study 13
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.2: Calculate 2000 EVA bonus payout for a manager earning $ 200,000, assuming that the manager’s bonus is based 100 % on the division’s EVA.
2000 2001
Target bonus
Actual EVA
Improvement
Improvement Goal
EVA Target
EVA
Performance
Starting bonus bank balance
Calculated bonus
New bonus bank balance
Bonus payout
Ending bonus bank balance
Handout Problem Set 8: Case Study 14
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.3: Recommendation about bonus system
Handout Problem Set 8: Case Study 15
Prof. Dr. Gunther Friedl – SS 2013

Technische Universität München
Question 17: Calculating a business unit’s EVA and the divisional manager’s bonus
Q17.3: Recommendation about bonus system
Handout Problem Set 8: Case Study 16
Prof. Dr. Gunther Friedl – SS 2013