Corporate Finance
Value Creation
Value is created when the return on invested capital exceeds its cost. This course connects ROIC, WACC, economic profit, growth and the duration of competitive advantage.
Course purpose
The decision examined
A company may grow earnings while destroying value if growth absorbs capital at an inadequate return. Historical ROIC must also be separated from the marginal return earned on new investment.
Objectives
Learning outcomes
- Construct a coherent ROIC.
- Calculate the return spread and economic profit.
- Connect reinvestment, marginal ROIC and competitive advantage.
Concepts
Key concepts
- ROIC
- NOPAT
- WACC
- Economic profit
- Reinvestment
- Competitive advantage
Syllabus
Course structure
- Value and performance
- Return spread
- Growth
- Reinvestment
- Competitive advantage
- Capital allocation
Extract
Analytical framework
Compare return with the cost of capital
Return on invested capital relates after-tax operating profit to the capital employed:
Return on invested capital
When ROIC exceeds WACC, invested capital produces a surplus before considering how long the spread can persist. Below WACC, investing more at the same return increases value destruction.
Full course
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