Excess Return

Knowledge Center

What is Excess Return? Description

Excess Return is the difference between actual wealth and expected wealth at the end of the measurement period. Good methodology to evaluate top management of public companies.

Excess Return calculation

The formula of Excess Return is straightforward:

       Actual Wealth (N)

-      Expected Wealth (N)

------------------------------------------------------

       Excess Return (N)

Actual Wealth is the future value of all the cashflows received over the measurement period.

Expected Wealth is the future value of the initial investment.

N is the number of periods over which the Excess Return is calculated.

Excess Return and MVA

Unlike MVA, Excess Return debits a company for the capital it has used since the beginning of the measurement period. And companies are credited for the returns their shareholders should have earned from dividends and share buybacks, reinvested in the market. Also unlike MVA, Excess Return does take into account intermediate cash returns to shareholders. Therefore Maximizing Excess Return should be the financial goal of any value-based corporation.

Limits of Excess Return

Excess Return can only be used at firm / corporate level and is not practical for performance evaluation over a specific period of time, since it is equities based, i.e. it expresses value accumulated as of a certain date.

Forum Forum discussions about Excess Return. Below you can ask a question about this topic, share your experiences, report a new development, or explain something. Start a new topic about Excess Return Share your knowledge here (or ask a question)   🔥 NEW What is the Equity Risk Premium? Jason Voss, in the FT on 7th November 2011 described the Equity Risk Premium (ERP) as follows "the additional rate of return that investors require to compensate them for the risk of holding stocks as... 5

Information Sources Various sources of information regarding Excess Return. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.

Research Links Jump to further research sources regarding Excess Return. News Videos Presentations   Books Academic More

Compare with Excess Return:  MVA

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing

More Management Methods, Models and Theory