An Analyst Is Estimating the ROIC of a Company That

question 12

Multiple Choice

An analyst is estimating the ROIC of a company that has zero fixed costs per unit and pays no taxes.The analyst makes the following forecasts: Sales next year will equal 250 units and will increase at 10 percent for each of the two following years.Prices per unit will be $102,$104,and $110,which simply embody inflation forecasts.Costs per unit will be constant at $90.Current capital invested is $20,000,and the firm will reinvest 50 percent of profits.What is the ROIC for each of the three years? If this is a competitive industry,are the results realistic?

• A)ROICs in the next three years are 15.0 percent,17.9 percent,and 25.8 percent,respectively;results are realistic for a competitive industry.
• B)ROICs in the next three years are 15.0 percent,16.5 percent,and 18.3 percent,respectively;results are realistic for a competitive industry.
• C)ROICs in the next three years are 15.0 percent,16.5 percent,and 18.3 percent,respectively;results are not realistic for a competitive industry.
• D)ROICs in the next three years are 15.0 percent,17.9 percent,and 25.8 percent,respectively,results are not realistic for a competitive industry.

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Definitions:

Required Rate

The minimum annual percentage return that an investment must yield to be considered worthwhile, often influenced by the risk involved and market conditions.

Expected Growth Rate

The annual rate at which an investment, earnings, or value is expected to grow.

Annual Dividend

Annual dividend is the total amount of dividend payments a shareholder receives from a company in one year.

Zero Growth Stock

A stock in a company which is not expected to experience any growth in dividends or earnings and typically pays a high dividend yield.