Blue plc is a relatively small company with only one SBU. It manufactures wire grilles for the
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The cooker sales sector uses £2m of capital and will return 14 per cent per annum for seven years when its planning horizon ends. Its WACC is 16 per cent.
The export sector has a positive performance spread of 2 per cent over WACC for the next six years. The required rate of return is 17 per cent. From Year 7 the performance spread becomes zero. This division uses £1.5m of capital.
Required
a. Calculate the annual (entity version) economic profit of each sector.
b. What is the total value creation from each if you assume profit numbers equate to cash flow numbers?
c. Display a value-creation profile chart and suggest possible action. Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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