Chapter11solutions - Chapter 11 Corporate Valuation and...

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Chapter 11 Corporate Valuation and Value-Based Management ANSWERS TO END-OF-CHAPTER QUESTIONS 11-3 A company can be profitable and yet have an ROIC that is less than the WACC if the company has large capital requirements. If ROIC is less than the WACC, then the company is not earning enough on its capital to satisfy its investors. Growth adds even more capital that is not satisfying investors, hence, growth decreases value. 11-4 Entrenched managers consume to many perquisites, such as lavish offices, excessive staffs, country club memberships, and corporate jets. They also invest in projects or acquisitions that make the firm larger, even if they don’t make the firm more valuable. SOLUTIONS TO END-OF-CHAPTER PROBLEMS 11-1 NOPAT = EBIT(1 - T) = 100(1 - 0.4) = $60. Net operating WC 09 = ($27 + $80 + $106) - ($52 + $28) = $213 - $80 = $133. Operating capital 09 = $133 + $265 = $398. Net operating WC 10 = ($28 + $84 + $112) - ($56 + $28) = $224 - $84 = $140. Operating capital 10 = $140 + $281 = $421. FCF = NOPAT - Net investment in operating capital = $100(0.6) - ($421 - $398) = $37.0.
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