Mercedes 2006 Annual Report Download - page 63

Financial performance measures
The financial performance measures used at the DaimlerChrysler
Group are oriented towards our investors’ interests and expecta-
tions, and provide the basis for value-based management.
Value added. For purposes of performance measurement,
DaimlerChrysler differentiates between Group and divisional level.
Value added is one element of the performance-measurement
system at both levels, and is calculated as the difference between
the operating result and the cost of capital of the average net
assets in that period.
Alternatively, value added can be calculated from the return on
net assets (RONA) by multiplying the difference between RONA
and the cost-of-capital rate by the average net assets in that
period.
Value added shows to which extent the Group and its divisions
achieve or exceed the minimum return requirements of the
shareholders and creditors, thus creating additional value. The
methodology of value added is based on the figures provided
by external reporting in accordance with US GAAP. This secures
transparency both within the DaimlerChrysler Group and
towards shareholders and creditors.
Profit measure. The profit measure used at Group level is net
operating income (loss), which can be derived from net income
(loss) as shown in the statement of income (loss). At divisional
level, operating profit (loss) is used. As shown on page 46, operat-
ing profit (loss) is derived from income (loss) before financial
income (expense), and reflects the specific earnings responsibil-
ity of the divisions.
Net assets. Net assets are calculated at Group level from the
balance-sheet components of stockholders’ equity (including
minority interests) and the financial liabilities and accrued pension
obligations of the industrial business. At the divisional level
of the industrial business, net assets are calculated on the basis
of the allocable operating components of assets and liabilities.
Average net assets are calculated as an average of the net assets
at the beginning and at the end of the financial year.
For
Financial Services, performance measurement is on an equity
basis, in line with the usual practice in the banking business.
Cost of capital. The required rate of return on net assets and
thus the cost of capital are derived from the minimum returns
that investors expect on their invested capital. Due to their long-
term financing character, unfunded pension obligations are
in
cluded in addition to equity and debt when calculating the Group’s
cost of capital. The cost of equity is calculated using the capital-
asset-pricing model (CAPM), using the interest rate for long-term,
risk-free securities (such as government bonds and other fixed-
interest securities) plus a risk premium reflecting the specific risks
of an investment in DaimlerChrysler shares. The cost of debt
is derived from the required rate of return for obligations entered
into by the Group with external lenders. The cost of capital
of the unfunded pension obligations is calculated on the basis of
discount rates used according to US GAAP. The Group’s cost of
capital is then a result of the weighted average of the individually
required rates of return; in the year under review, the cost of
capital amounted to 7% after taxes. For the industrial divisions,
the cost of capital amounted to 11% before taxes; for Financial
Services, a cost of equity of 14% before taxes was used.
Management Report | Profitability | 47
Cost of
Capital (%)
Profit
Measure
Net
Assets
Cost of Capital
Net
Assets
Return on Net
Assets (RONA) Cost of Capital (%)