Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Chapter 2 Solutions
Fundamental Principles of Value Creation
1. Higher ROIC generally means higher free cash flow because it means the firm need not
2. Although the discounted cash flow gives an estimate of value, the sources of value
3. Growth destroys value when the ROIC on the new projects is less than the cost of capital.
4. A firm with high ROIC and low growth will benefit more from an increase in growth. A
5. The two organic sources of growth are by competing customers away from rivals and by
expanding the portfolio by either developing new products or expanding the market.
6. The conservation of value principle states that anything that does not increase cash flows
does not increase value. An example is an Internet company that lures viewers to a web
7. Changing capital structure creates value only if it improves cash flows. The usual way
8. Financial engineering is the use of tools other than straight debt and equity to manage a
9. There is no value in simply becoming bigger through an acquisition. An acquisition will
2
11. The managers of a firm should hedge only risks that are not part of the core business.
12. Managers should not take on cash flow risk that has a measureable probability of
3
