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Question
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 13 percent, respectively; results are realistic for a competitive industry.
c) ROICs in the next three years are 15.0 percent, 16.5 percent, and 13 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.
Answer
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