SuperiorCo earns a return on invested capital of 20 percent on its existing stores. Given intense competition for new stores sites, you believe new stores will only earn their cost of capital. Consequently, you set return on new capital (8 percent) equal to the cost of capital (8 percent) in the continuing value formula. A colleague argues that this is too conservative, as SuperiorCo will create value well beyond the forecast period. What is the flaw in your colleague's argument?
Answer to relevant QuestionsS˜ao Paolo Foods is a Brazilian producer of breads and other baked goods. Over the past year, profitability has been strong and the share price has risen from R$15 per share to R$25 per share. The company has 20 million ...You are analyzing a distressed bond with one year to maturity. The bond has a face value of $100 and pays a coupon rate of 5 percent per year. The bond is currently trading at $80. What is the yield to maturity on the bond? ...You are valuing DistressCo, a company struggling to hold market share. The company currently generates $120 million in revenue, but its revenue is expected to shrink to $100 million next year. Cost of sales currently equals ...You are valuing multiple steady-state companies in the same industry. Company A is projected to earn $160 in EBITA, grow at 2 percent per year, and generate ROICs equal to 15 percent. Company C is projected to earn $120 in ...Exhibit 15.1 shows how (cumulative) returns on investments in the equity market index have consistently exceeded returns on investments in government bonds over the past 200 years. This being the case, would you recommend ...
Post your question