Posted: August 9th, 2016

What do you believe are some reasons for the difference?

The following information (in millions) pertains to a small publicly-traded company.

Cumulative present value of horizon period ROPI $16,000
Present value of terminal period ROPI 44,000
Net operating assets, beginning of year 18,000
Net nonoperating obligations 6,000
Number of shares outstanding, in millions 625

Use ROPI model to value the equity of the company.

The company’s stock is currently trading at $100 per share. How does your valuation estimate compare with this closing price?

What do you believe are some reasons for the difference?

You have recently taken a position as CFO of High Tech Corporation, a manufacturer of consumer electronics. The industry is widely regarded as one of the more stable across the economic spectrum and offers good long-term growth prospects. In addition to High Tech Corp., there are several other well-capitalized competitors, and each company commands roughly identical market shares. Each competitor has highly efficient manufacturing processes and operates at virtually identical margins. In your new position as CFO, your incentive compensation plan is primarily driven by ROPI. High Tech Corp. has historically been ROPI neutral while its peers in have been ROPI positive.
High Tech Corp. Industry Peers
Net operating profit margin (NOPM) 12.0% 12.0%
Working Capital as % of NOA 20.0% 15.0%
Debt to market value of equity (%) 0.0% 34.0%
Cost of Debt 4.0% 4.0%
Cost of Equity 9.0% 10.0%
WACC 9.0% 8.0%

Using the provided information, suggest and explain two specific and IMMEDIATE actions for High Tech Corp. to achieve positive ROPI.

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