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fm15 12 - risky negative NPV projects to try and hit a home...

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Mini Case: 15 - 12 k. What is the ROIC of each division for 5% growth and for 6% growth? How is this related to MVA? Answer: Division A Division B Capital 0 $780 $780 $270 $270 Growth 5% 6% 5% 6% Sales 1 $1,050 $1,060 $1,050 $1,060 Nopat 1 $63 $63.6 $42 $42.4 Roic 1 8.1% 8.2% 15.6% 15.7% Mva (300.0) (360.0) 300.0 385.0 The expected ROIC of division A is less than the WACC, so the division should postpone growth efforts until it improves ROIC by reducing capital requirements (e.g., reducing inventory) and/or improving profitability. The expected ROIC of division b is greater than the WACC, so the division should continue with its growth plans. l. List six potential managerial behaviors that can harm a firm’s value. Answer: Managers might: 1. Expend too little time and effort. 2. Consume too many nonpecuniary benefits. 3. Avoid difficult decisions (e.g., close plant) out of loyalty to friends in company. 4. Reject risky positive NPV projects to avoid looking bad if project fails; take on
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Unformatted text preview: risky negative NPV projects to try and hit a home run. 5. Avoid returning capital to investors by making excess investments in marketable securities or by paying too much for acquisitions. 6. Massage information releases or manage earnings to avoid revealing bad news. m. The managers at KFS have heard that corporate governance can affect shareholder value. What is corporate governance? List five corporate governance provisions that are internal to a firm and are under its control. Answer: Corporate governance is the set of laws, rules, and procedures that influence a company’s operations and the decisions made by its managers. The provisions under a firm’s control are: (1) monitoring and discipline by the board of directors; (2) charter provisions and bylaws that affect the likelihood of hostile takeovers; (3) compensation plans; (4) capital structure choices; and (5) accounting control systems....
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