Chapter_02-Solutions

Chapter_02-Solutions - Valuation: Measuring and Managing...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 2 Solutions Fundamental Principles of Value Creation 1. Higher ROIC generally means higher free cash flow because it means the firm need not reinvest as much to maintain its growth and operating cash flow. The relationship between ROIC, growth, and cash flow is that cash flow can be broken down into ROIC and revenue growth. 2. Although the discounted cash flow gives an estimate of value, the sources of value creation are growth and increasing ROIC. 3. Growth destroys value when the ROIC on the new projects is less than the cost of capital. 4. A firm with high ROIC and low growth will benefit more from an increase in growth. A firm with high growth and low ROIC will benefit more from an increase in ROIC. Given the fairly competitive nature of the software business, firms in that industry probably have low ROIC and high growth; therefore, the software companies would benefit more from an increase in ROIC. Since utilities are usually regulated but allowed to earn a high
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at UGA.

Page1 / 2

Chapter_02-Solutions - Valuation: Measuring and Managing...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online