Topic I. Foundations of Value Flashcards
What is the primary goal of a business?
To maximize economic profit.
What is economic profit?
The difference between the total revenue received by the firm from its sales and the total opportunity costs of all the resources used by the firm.
What is the revenue-based equation for economic profit?
Revenues
- Explicit Costs
- Opportunity Costs
Economic Profit
What is the ROIC-based equation for economic profit?
Economic Profit = (ROIC - WACC)*(Amount Invested)
How do you calculate ROIC?
ROIC = NOPAT / Invested Capital
What is the equation for NOPAT?
NOPAT = Gross Profit - (Operating Expenses+Taxes)
Does NOPAT included changes in net working capital?
No! Does not include changes in net working capital
Does NOPAT include depreciaiton and amortization?
Yes. It includes non-cash expenses such as depreciation and amortization
Does NOPAT include capital expenditures?
No! Does not include capital expenditures
What is the equation for ROIC and, using that equation, how do you increase ROIC?
Increase by:
- Reducing tax rate
- Increasing Price/Unit
- Decreasing Cost/Unit
- Lowering Invested Capital/Unit
What are the three primary sources of revenue growth?
- New products (portfolio growth)
- Gains in market share
- M&A
What are the two ways to improve cash flow?
- Increase ROIC
- Increase Revenue through Revenue Growth
What is the equation relating Value to:
- NOPAT
- ROIC
- WACC
- Growth (g)
Why is sustaining growth so hard?
“Sustaining growth is difficult because most product markets have natural life cycles. The market for a product—which means the market for a narrow product category sold to a specific customer segment in a specific geography—typically follows an S-curve over its life cycle until maturity,”
