Question

You are an equity analyst and have computed the following figures for two cement companies. The first, CementCo, has NOPLAT of $1,550 million, and invested capital without goodwill of $15,000 million. The second, CementExports, has NOPLAT of $1,750 million, and invested capital without goodwill of $16,000 million. If the cost of capital for both firms is 10 percent, what is the ROIC for each company? Which company is creating value in this year?

a.) ROIC is 10.3 percent for Cement CO and 10.9 percent for CementExports; both companies are creating value

b.) ROIC is 9.1 percent for Cement CO and 10.9 percent for CementExports; both companies are creating value

c.) ROIC is 9.1 percent for Cement CO and 10.9 percent for CementExports; only CementExports is creating value

d.) ROIC is 10.3 percent for Cement CO and 10.9 percent for CementExports; neither of the companies are creating value

e.) ROIC is 10.3 percent for Cement CO and 11.2 percent for CementExports; both companies are creating value

Answer 1

Option a.

Cement Co has NOPLAT $1550 million and invested capital of $15000 million.

ROIC = NOPLAT / invested capital

           = 1550 / 15000

           = 10.3%

Value creation for Cement CO = ROIC - wacc

                                                 = 10.3% - 10%

                                                 = 0.3%

Cement Exports has NOPLAT $1750 million and invested capital of $16000 million.

ROIC = NOPLAT / invested capital

           = 1750 / 16000

           = 10.9%

Value creation for Cement Export = ROIC - wacc

                                                 = 10.9% - 10%

                                                 = 0.9%

thus, Option a . ROIC is 10.3 percent for Cement CO and 10.9 percent for Cement Exports; both companies are creating value