Which of the following are the fundamental factors defining the firm?s value? Ch

Question

Which of the following are the fundamental factors defining the firm?s value? Check all that apply. The ratio of operating capital to sales The ratio of NOPAT to sales Operating capital WACC NOPAT Complete the following table by using the forecasted information for sales, operating profitability, capital requirements, and the WACC for a constant growth company. (Note: Assume there are no costs and no taxes.) Variable Value Which of the following describes a situation in which sales growth decreases a profitable firm?s value? Very low capital requirements reduce a firm?s EROIC well below its WACC. Very high capital requirements reduce a firm?s EROIC well below its WACC. Very high capital requirements reduce a firm?s EROIC well below its NOPAT. Very high capital requirements reduce a firm?s WACC well below its EROIC.

Explanation / Answer

Sales 2000000 Operating Profiability 10% Capital Requirement 80% Growth 12% WACC 20% Capital(2000000*80%) 1600000 NOPAT sales* profitability % 2000000*10% 200000 EROIC NOPAT/Capital 200000/1600000 12.50% Value of Firm NOPAT/wacc-g 200000/20%-12% 2500000 Following a describes a situation in which sales growth decreases a profiable firm's value Very high caital requirements reduce a firm's EROICwell below its NOPAT

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