Exam 2: Fundamental Principles of Value Creation

Companies can increase their value by shifting the listing country,as demonstrated by the fact that U.S.companies have had higher valuation multiples than companies based in Asia.

For a given company,next year's NOPLAT is $200.For the foreseeable future,the growth rate will be 5 percent,the ROIC will be 10 percent,and the WACC will be 8 percent.Using the key driver formula,calculate the value of the company.

A company with an ROIC of 45 percent and a cost of capital of 8 percent is considering an investment opportunity of similar risk to its existing investments.If the new opportunity would generate a 30 percent ROIC,what should the company do?

When ROIC equals the cost of capital,there is no relationship between growth and value.

When a company has an ROIC greater than its cost of capital,faster growth increases value,but when it has an ROIC less than its cost of capital,what is the effect on value?

Return on invested capital and revenue growth determine how revenues are converted into cash flows,and value is created only when return on invested capital is greater than cost of capital.

If the growth rate of a company is 2.1 percent and the ROIC is 9 percent,what is the investment rate?

Economic profit consists of the spread between ROIC and cost of capital and is useful in determining which business units or investment opportunities would create more value.

For a given company,next year's NOPLAT is $50.For the foreseeable future,the growth rate will be 3 percent,the ROIC will be 12 percent,and the weighted average cost of capital (WACC )will be 10 percent.Using the key driver formula,calculate the value of the company.

Organic growth often creates more value than growth from acquisitions.

Companies can generally create more value by competing to lure customers away from rivals than by expanding their portfolios by either developing new products or expanding the market.

Explain how the current level of return on invested capital (ROIC )should influence managers' decision concerning their focus on the two sources of value creation.

For a given incremental increase in revenue from each of the following sources of growth,which source would generally create the most shareholder value?

If the growth rate of a company is 5 percent and the investment rate is 40 percent,what is the ROIC?

A 10 percent increase in value is most likely to result from a 10 percent increase in which of the following?

If the investment rate of a company is 10 percent and the ROIC is 20 percent,what is the growth rate?

Focusing on improving earnings and short-term cash flow will consequently lead to value creation.

Since value is based on discounted cash flows,a company or an investor need not analyze growth and return on invested capital (ROIC).