Threshold margins, growth, and inflation: Creating real economic value

This paper examines financial strategy by focusing on the minimum operating profit (threshold) margin necessary to create firm value. Starting from a model which describes the interrelationships among exogenous and endogenous variables that affect the market value of the firm, the firm's potential growth in sales (and value) is expressed as a function of the underlying financial and operating parameters. Computer simulation is used to track the effect of changing the underlying parameters on firm value growth and threshold margin. Effects of changes in parameter values, both within and beyond management control, are investigated. The implications of these effects for the financial manager are then explored.