A mature firm is expected to generate net revenues of USD 100 million in 1 year. The long-term expected EBIT margin is 25%, the tax rate is 21%, and the WACC is 10%. The firm can invest up to 30% into projects that generate a return (ROIC) of 8%. Long-term expected inflation is 2%.

Part A:

Carefully answer the following questions:

a) What's the value of the firm (enterprise value, EV) under the current reinvestment policy?
b) How, if at all, would you change the reinvestment policy, assuming the ROIC is given? And what would be the long-term growth rate and EV under the revised reinvestment policy?
c) How can you explain the difference between your answers to questions (a) and (b)?

Part B:
Assume that, thanks to a new innovation, the long-term reinvestment return ROIC of the company considered before increases from 8% to 10%. What's the relation between reinvestment and EV under this new scenario? And why?

Answer rating: 100% (QA)

Part A a What s the value of the firm enter prise value EV under the current reinvest ment policy AN... View the full answer