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Discuss the three generic sources of a company’s growth, their relative importance for its growth, and the implications for a company’s strategy.
Identify and discuss an example where growth in market share through a price war created long-term value for a company.
Why do company growth rates typically converge much more quickly toward the average rate across all companies than their rates of ROIC.
If growth from gaining market share through product promotion and pricing rarely creates much value, why do most consumer goods companies.
If BrandCo’s shares are trading at $57 per share, what is the company’s market capitalization (value of equity)?
What are the three components required to calculate economic profit? Determine BrandCo’s economic profit in years 1 to 6.
Why do companies with equity investments tend to have a lower return on assets than companies with only core operations?
Many companies hold significant amounts of excess cash, or cash above the amount required for day-to-day operations.
When managers and boards of directors evaluate firm performance, how might focusing exclusively on corporate earnings lead them astray?
Give examples of situations where these interests are not complementary. If interests conflict, what should management do?
What more could boards of directors and shareholders do to ensure that managers pursue long-term value creation?
How does return on invested capital (ROIC) affect a company’s cash flow? Explain the relationship between ROIC, growth, and cash flow.
Which type of business, a pharmaceutical firm or an electric utility, would benefit more from improving ROIC than from increasing growth? Why?
What is the conservation of value principle? Provide some examples of where it might apply.
How much cash flow risk should a company take on? How should it manage risks with extreme outcomes that could potentially bankrupt the company.
What are the potential reasons why TRS over short periods of time may not reflect the actual performance of a company and its management?
Suppose that one year ago you bought 100 shares of SodaCo for $10 per share with the expectation of receiving a perpetual dividend of $1 per share.
Why is the old way of decomposing TRS (into changes in earnings, changes in P/E, and dividend yield) not the best way to understand a company’s performance?
In the recommended approach to decomposing TRS, explain the theory behind the zero-growth return. What is it? What drives it?
Many corporate executives focus on earnings per share (EPS) and attempt to manage reported earnings in order to meet analysts’ expectations.
If a company’s value is not driven by its short-term earnings, why do investors spend so much time analyzing a company’s annual or even quarterly earnings.
In inflationary periods for input prices, what happens to earnings when firms change from first-in first-out (FIFO) to last-in first-out (LIFO) inventory.
Over the past five years, the highest share price for HighTechCo, a 15-yearold software company, was around $650, and its lowest price was around $150.
Why do executives spend so much time and effort on communicating with noise traders if intrinsic investors ultimately drive a company’s share price?
Would a company’s share price benefit from having fewer traders and more fundamental investors among the company’s shareholders? Why or why not?