What is the flaw in your colleagues argument

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Reference no: EM131276149

SuperiorCo earns a return on invested capital of 20 percent on its existing stores. Given intense competition for new store sites, you believe new stores will earn only their cost of capital.

Consequently, you set return on new invested capital (RONIC) (8 percent) equal to the cost of capital (8 percent) in the continuing-value formula. A colleague argues that this is too conservative, as SuperiorCo will create value well beyond the forecast period. What is the flaw in your colleague's argument?

Reference no: EM131276149

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