Explain the Concept Behind the Residual Operating Income (ROPI) Model

Question

Examlex · Accepted Answer

The Answer is The ROPI model is the idea that owners and non-owners (e.g. bondholders) each expect a certain amount of return in exchange for the money that they give to the firm. For the firm, this return amounts to a cost. This cost, calculated as WACC × Net Operating Assets, is often referred to as expected net operating profits after tax (Expected NOPAT).
Anything the firm earns over and above the Expected NOPAT is money that creates value for the firm. The difference between the firm's actual NOPAT and the Expected NOPAT is called Residual Operating Income (ROPI). Hence, firms that can produce substantial Residual Operating Income should be valued higher, while companies that have low, or negative, Residual Operating Income, should be valued lower.

Explain the Concept Behind the Residual Operating Income (ROPI) Model

Short Answer

Correct Answer:
Verified

Explain the Concept Behind the Residual Operating Income (ROPI) Model

Short Answer

Correct Answer:VerifiedShow Answer

Correct Answer:
Verified