Unable to generate return

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Reference no: EM131968713

1-Now let’s suppose that a company create a competitive advantage: it discovers a more efficient way to produce its product (which gives it a small cost advantage) and is able to sustainably increase it ROE from 8% to 10%.

This company now has the following characteristics:

Return On Equity = 10%

Cost Of Equity = 8%

Shareholder’s Equity = $100m

Cash = $0

Value the equity in this company using the following assumptions:

A) Value with with sustainable growth = 0%?

B) Value with sustainable growth rate = 4%?

C) Can this company create value for its investors by reinvesting its cash flows? Explain why, or why not.

2-Conceptual Question: What does the management of the a company that has NO competitive advantage, and is therefore unable to generate a return (ROE 8%) above its cost of equity(COE 8%) need to focus on if it wants to create value for its investors?

Reference no: EM131968713

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