Smooth Inc. currently reports a Net Operating Profit or Loss After Tax (NOPLAT) of USD 800...
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Smooth Inc. currently reports a Net Operating Profit or Loss After Tax (NOPLAT) of USD 800 million, which is expected to grow by 8%. Return on Invested Capital (ROIC) is 18% and the company's Weighted Average Cost of Capital (WACC) is 18%. The company is considering the following strategic alternatives: Alternative 1: "Return Focus" - Prioritize to increase return (ROIC) to 24% while allowing NOPLAT growth rate (g) to slow down to 6%. Alternative 2: "Growth Focus" - Prioritize to increase NOPLAT growth rate (g) to 10% while allowing ROIC to fall to 16%. Alternative 3: "Turbo-Growth" - Prioritize to increase NOPLAT growth rate (g) to 12% while allowing ROIC to fall further to 14%. Its current financial figures and the projected results of these strategic options are summarized in the table below. Smooth Inc. Current Status Return Focus Growth Focus Turbo-Growth NOPLAT (USD million) 800 800 800 800 Growth Rate (g) 8% 6% 10% 12% ROIC 18% 24% 16% 14% Formula 1: Formula 4: Formula 5: IR WACC 18% 18% 18% 18% FCF IRg/ROIC FCF = NOPLAT x (1-g/ ROIC) Value = NOPLAT x (1-g/ ROIC)/(WACC - g) Value i. Compute the Investment Rate (IR), Free Cash Flow (FCF) and, assuming these figures will continue in perpetuity, valuation of Steady Co. (currently and under each of the Strategic Alternatives). (1A-i. 4 marks) ii. Recommend one of the 3 Strategic Alternatives above that Smooth Inc. should take and explain why this should be chosen over the other alternatives. (1A-ii. 2 marks) Smooth Inc. currently reports a Net Operating Profit or Loss After Tax (NOPLAT) of USD 800 million, which is expected to grow by 8%. Return on Invested Capital (ROIC) is 18% and the company's Weighted Average Cost of Capital (WACC) is 18%. The company is considering the following strategic alternatives: Alternative 1: "Return Focus" - Prioritize to increase return (ROIC) to 24% while allowing NOPLAT growth rate (g) to slow down to 6%. Alternative 2: "Growth Focus" - Prioritize to increase NOPLAT growth rate (g) to 10% while allowing ROIC to fall to 16%. Alternative 3: "Turbo-Growth" - Prioritize to increase NOPLAT growth rate (g) to 12% while allowing ROIC to fall further to 14%. Its current financial figures and the projected results of these strategic options are summarized in the table below. Smooth Inc. Current Status Return Focus Growth Focus Turbo-Growth NOPLAT (USD million) 800 800 800 800 Growth Rate (g) 8% 6% 10% 12% ROIC 18% 24% 16% 14% Formula 1: Formula 4: Formula 5: IR WACC 18% 18% 18% 18% FCF IRg/ROIC FCF = NOPLAT x (1-g/ ROIC) Value = NOPLAT x (1-g/ ROIC)/(WACC - g) Value i. Compute the Investment Rate (IR), Free Cash Flow (FCF) and, assuming these figures will continue in perpetuity, valuation of Steady Co. (currently and under each of the Strategic Alternatives). (1A-i. 4 marks) ii. Recommend one of the 3 Strategic Alternatives above that Smooth Inc. should take and explain why this should be chosen over the other alternatives. (1A-ii. 2 marks)
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i Compute the Investment Rate IR Free Cash Flow FCF and assuming these figures will continue in perp... View the full answer
Related Book For
Financial Management Theory and Practice
ISBN: 978-1305632295
15th edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt
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