Valuation
Measuring and Managing the Value of Companies
5th Edition
Chapter 8 Solutions
Analyzing Performance and Competitive Position
Version 1.0
April 1, 2010
Chapter 8
Questions 1–3
JetCo Gulf Question 1
Revenues 600.0 800.0 The ROIC of Gulf Aviation is 12.5 percent versus only 9.4 percent for JetCo. Since both
companies have a cost of capital of 8 percent, Gulf Aviation is generating a higher economic
Operating profit 100.0 100.0 spread. Gulf Aviation also has a higher economic profit, $27 million versus only $11
Operating taxes (25.0) (25.0) million for JetCo.
NOPLAT 75.0 75.0
Question 2
Invested capital 800.0 600.0 JetCo has an operating margin of 16.7 percent versus only 12.5 percent for Gulf Aviation.
Goodwill –500.0 JetCo has a capital turnover ratio of 0.75 – versus 1.33 – for Gulf Aviation.
Capital with goodwill 800.0 1,100.0 Both ratios are equally important. Either ratio can drive an ROIC higher (or lower) than
its cost of capital.
Competitive benchmarking Question 3
Key ratios To measure value creation post-acquisition, ROIC must be measured with goodwill.
Gulf Gulf With $500 million in new goodwill, ROIC drops from 12.5 percent to 6.8 percent.
(without (with Since this is below the company’s 8 percent cost of capital, the acquisition is
Percent JetCo goodwill) goodwill)
currently destroying value. From a competitive perspective, Gulf is the better
Operating margin 16.7% 12.5% 12.5% company. Comparative operational performance is best measured without goodwill.
Operating tax rate 25.0% 25.0% 25.0%
After-tax return on sales 12.5% 9.4% 9.4%
Capital turnover 0.75 1.33 0.73
Return on capital 9.4% 12.5% 6.8%
– Cost of capital 8.0% 8.0% 8.0%
Economic spread 1.4% 4.5% –1.2%
Invested capital 800.0 600.0 1100.0
Economic profit 11.0 27.0 (13.0)
Key data
Tax rate 25%
Chapter 8 Procter & Gamble
Question 5 Annual report, 2009
2008 2009 Procter & Gamble 2009
Price growth 5% 1% Net sales decreased 3% in 2009 to $79.0 billion behind a 3% decline
Quantity growth –3% 4% in unit volume. Unfavorable foreign exchange reduced net sales by
Mix changes –1% –1% 4% as many foreign currencies weakened versus the U.S. dollar.
Currency effects –4% 5% Price increases, taken across all segments, primarily to offset higher
Net sales –3% 9% commodity costs and foreign exchange impacts, added 5% to net
sales. Negative product mix reduced net sales by 1% mainly due to
Without currency 1% 4% disproportionate volume declines in our more discretionary categories.
Procter & Gamble 2008
Net sales increased 9% in 2008 to $81.7 billion behind 4% unit volume
growth, a favorable 5% foreign exchange impact and a positive 1%
pricing impact. Favorable foreign exchange resulted primarily from the
strengthening of European and other currencies relative to the U.S.
dollar. Price increases were taken across a number of our businesses
primarily to offset higher commodity costs. Mix had a negative 1%
impact on net sales primarily due to disproportionate growth in
developing regions, where selling prices are below the Company
average.
Source: www.pg.com/en_US/downloads/investors/annual_reports/2009/PG_2009_AnnualReport.pdf.
Chapter 8
Question 4
Gulf Aviation Year 1 Year 2 Year 3
Revenues 800 800 800
DefenseCo
DefenseCo 1,500 1,600 1,700
Gulf Aviation –200 800
Consolidated revenues 1,500 1,800 2,500
Consolidated growth n/a 20.0% 38.9%
Organic growth
Prior year 1,700 2,400
Current year 1,500 1,800 2,500
Organic growth n/a 5.9% 4.2%
Consolidation data
Percent of year –25% 100%