How Finance Works

 

4

Sources of Value Creation

Risk, costly capital, and the origins of value

In chapter 1, we discussed how creating value for shareholders is an important goal for managers. But what does it mean to “create” value? And how do you do it? Let’s take a look at two extreme examples to better understand how value can be created or destroyed. For value creation, let’s take a look at Apple’s stock price performance for the last thirty years. (See figure 4-1.)

As you can see from the chart, Apple wasn’t creating much value for its shareholders for the majority of its life as a public company. The company existed, but it might as well not have bothered; while expending a great deal of effort to compete with IBM and Microsoft, it was essentially treading ...