18

OUR PORTFOLIO HIGHLIGHTS

An Alignment with Shareholder Value

We track Wealth Added (WA) as a key performance indicator. Our group WA for the year was S$15
billion, with S$6 billion from direct investment activities.
The key benefit of using WA as a performance indicator is that it takes into account the risk-adjusted
return, called the capital charge, that an investor would expect. It factors in the capital employed to
achieve the returns, and the risk associated with each investment.
To earn positive WA for our shareholder, Temasek must deliver a return that is higher than its capital
charge. The return calculation for Temasek also explicitly takes into account any change in the
perpetuity value of the current costs of operating Temasek.

WEALTH ADDED MEASURES EXCESS RETURNS OVER HURDLE

+ Dividend
paid to our
shareholder

Market
Value (MV)

+ Change
in MV

of our
portfolio
as at
31 Mar 06

Wealth Added
= Change in Market Value
+ Dividend Paid
- Net New Capital Received
- Capital Charge
- Perpetuity Value of Operating Cost

- Net new
capital
received
by us
- Change
in perpetuity
value of our
operating
cost

- Capital Charge
=
Total return
to our
shareholder

on MV as at
31 Mar 05
= Wealth Added
for our shareholder for
FY 2005 ended 31 Mar 06

MV as at
31 Mar 05

Calculating Wealth Added

The total return to a shareholder is calculated as the change in the market value of the investments (or the change in
book value in the case of unlisted assets), plus dividends to the shareholder, adjusted for any net new capital from the
shareholder. In the case of Temasek, the total return to our shareholder is further adjusted for any change in the perpetuity
value of the costs of operating Temasek, i.e. the change in the present value of a recurring stream of the current costs
of operating Temasek.
The capital charge or minimum required return for the shareholder is defined as a risk-adjusted cost of capital return
on the market value of his portfolio at the start of the year.
The Wealth Added for the shareholder is his total return less the capital charge.
Example:
Consider a listed investment that has a market value of $1,000 at the start of the year, which then rises to $1,200 at
the end of the year. The investment pays dividends of $50 during the year, and issues $120 of new equity during the
year. Assume the cost of capital is 10%, giving a capital charge of $100, or 10% x $1,000 on the starting market value.
The wealth added created by this investment for its shareholder is therefore = (1,200 - 1,000) + 50 - 120 - (10% x
1,000) = $30.