Estimates of the Sensitivities of the Value of the Firm to Profitability, Growth, and Capital Intensity

Value-based management systems concentrate on actions that generate value for the shareholders in the wealth creation process (Fisher 1995; Lieber 1996; Walbert 1994). This study focuses explicitly on profitability, growth, and capital intensity as drivers of the value of the firm by extending a free cash flow valuation model for the firm. The extended model is used to provide information about the sensitivities of the value of the firm to changes in the firm's profitability, growth, and capital intensity. These sensitivities are presented in terms of partial derivatives and dollar changes. The partial derivatives show the changes in the value of the firm resulting from a small change in the measures for profitability, growth, or capital intensity. Each dollar amount shows the dollar changes in the value of the firm resulting from a small change in the profitability, growth, or capital intensity measures. These sensitivities show the impact of changes in the profitability, growth, and capital intensity measures on the value of the firm. This information is valuable in helping managers predict the results of actions to improve the wealth generating ability of the firm by managing these value drivers more effectively