Question 1 (30 points)
a) What type of business, a software company or an electric utility , would benefit more from increasing ROIC than from increasing growth? Why?
b) Under what circumstances would changing the capital structure of an electric utility company affect its value.?
c) Why do companies operating within the pharmaceutical and biotechnology companies typically sustain higher ROIC's than firms in the technology , hardware and equipment industries?
Question 2 (20 Points)
1. A. Explain why ROIC is a better analytical tool than return on equity (ROE) and return on assets (ROA)
2. B. Compute ROIC given the following information : EBITDA=$3,000, REVENUES=$5,000, INVESTED CAPTAL=$20,000, OPERATING CASH TAX RATE =25 percent
Question 3 See below for the data (50 points)
Question 2 is taken from chapter 6 review problems . Question one from chapter 6 review problem was done in week 3 discussion forum.. Now you have to do questions 2, 3 and 4 from chapter 6. These questions are listed below.
1. BrandCO currently has 50 million shares outstanding. If BrandCo's shares are trading at $19.16 per share , (i) what is the company's market capitalization (value of equity?). Assuming the market value of debt equal today's book value of debt, (ii) what percentage of the company's enterprise value is attributable to debt and what percentage is attributable to equity, Using these weights , (iii) compute the weighted average cost of capital. Assume the pretax cost of debt is 8% , the cost of equity 12% , and the marginal tax rate is 25 percent.
2. Using free cash flow ($69.1m) computed in question one, chapter 6, ( see the week 3 solution to this question), and the weighted average cost of capital computed above , estimate Brand Co's enterprise value using the growing perpetuity formula.. Assume free cash flows grow at 5 percent.
3. Assuming the market value of debt equals today's book value of debt, what is the intrinsic value of equity for BrandCO? What is the intrinsic value per share? Does it differ from the trading value?
Exhibit 6.18 presents the income statement and reorganized balance sheet for BrandCo, an $800 million consumer products company. Using the method- ology outlined in Exhibit 6.5, Answer question 2: 1,2, 3 above. Assume an operating tax rate of 25 percent. Using the methodology outlined in Exhibit 6.6.