Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Link Between

Corporate Strategy & Value Creation

Professor David Wessels ©2016

The Wharton School of the University of Pennsylvania
3620 Locust Walk, Philadelphia PA 19104
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Session Overview
• Traditional rules of thumb about value creation can be misleading, and in some
cases harmful. We start our discussion with three important lessons:
– Lesson 1: Value is driven by growth, but not all growth is created equal

– Lesson 2: Driving towards higher multiples does not guarantee value creation

– Lesson 3: EBITDA & Earnings Per Share (EPS) often fail to measure value

• The value of a company can be traced to four key value drivers, core operating
profit, return on capital, cost of capital, and organic revenue growth.
– Value creation & the practice of finance is about evaluating tradeoffs. Although an action can
lead to an improvement in one metric like revenue growth, it may have an adverse impact on
other metrics, like return on capital.

– Every line of business, geography, customer group, distribution channel, must be thoroughly
evaluated for the potential of growth and profitability.

Professor David Wessels

The Wharton School of the University of Pennsylvania 2
 Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Driving Value Creation: The C-Suite Perspective

• Value creation is driven by a clever
balance of growth, return on capital, Portfolio
Momentum
cost of capital, and the ability to
sustain performance over time. Organic Market
Growth
Specifically: share

1. Organic revenue growth

Value Return on
Economic capital
2. A healthy return on capital. creation spread _
3. Sustainability of performance
Cost of
capital
4. Ability to manage risk Sustainability

• In this presentation, we examine corporate

strategy through the lens of value creation.

Professor David Wessels

The Wharton School of the University of Pennsylvania 3
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Lesson 1: H&R Block

H&R Block Expects to Meet Earnings Outlook

KANSAS CITY, Mo. (Reuters) - H&R Block Inc. (HRB)

said Thursday its tax preparations revenues rose 12.4
percent in January and February, putting it on track to
meet its previously announced outlook for annual earnings
and revenue.

The Kansas City-based company said it had $1.2 billion in

fees from tax preparation and related services in the first two
months of the year. Total clients served rose 3.8 percent to
11.2 million, with the average fee per client up 9 percent
to $115.93.

When H&R Block announced its third quarter earnings on

Feb. 27, the company said it expected full-year earnings of
$2.20 to $2.30 per share, an increase of 45 percent to 50
percent over last year's results. The company also projected
annual revenue growth of 10 percent to 15 percent.

Professor David Wessels

The Wharton School of the University of Pennsylvania 4
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Focus on Growth: In the Board Room

Growth Execution
“Another successful year for H&R Block and our various “Solid execution by Tax Services in expanding retail
businesses. We increased our revenue to $4.9 billion and locations in preparation for the upcoming tax filing season.
generated net income of $491 million, or $1.49 per share. The company now expects that an additional 1,000 H&R
These statistics mean that H&R Block is one of the largest Block locations will be operating this tax season.”
and most successful companies in America.”
H&R Block
H&R Block Number of Offices
Total Revenues, $ billions
13,548
4.9
12,461
4.4
4.2 11,185
10,635
3.7
3.3 9,015

2002 2003 2004 2005 2006 2002 2003 2004 2005 2006

Professor David Wessels

The Wharton School of the University of Pennsylvania 5
 Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Reality at H&R Block

Let’s issue spot using a value
creation framework… H&R Block Operating Statistics

Total Clients  Clients per 
New Offices
Year (millions) Retail Offices Office
Top-line Customers per 2002 20.9 9,015 2,318.4
growth Revenues office
per office 2003 21.7 10,635 2,040.4
Value Revenues per
Creation customer 2004 21.6 11,185 1,931.2
2005 21.4 12,461 1,717.4
Margin
Return on 2006 21.9 13,548 1,616.5
capital Capital
Efficiency
Source: 10‐K 2002‐2006

Professor David Wessels

The Wharton School of the University of Pennsylvania 6
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Identifying the Issues

“If you don’t know the issues, you can’t engage effectively”
Jon Spector – CEO, the Conference Board

New
Offices
Top-Line
Growth
Comparables
Growth

Professor David Wessels

The Wharton School of the University of Pennsylvania 7
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Market Response

“Breeden Capital Management seeks 3 H&R Block board seats”
• Richard Breeden, a hedge fund investor and former chairman of the U.S. Securities and Exchange Commission, on
Wednesday said he plans to seek three board seats at H&R Block Inc. (HRB.N: Quote, Profile, Research), citing
disappointment in the largest U.S. tax preparer's financial performance.
• "After five years of persistent and substantial underperformance, some new members who aren't tied to decisions made
in the past would help,“ – Reuters, July 2007
H&R Block ousts CEO, names new chairman.
• No. 1 U.S. tax preparer H&R Block Inc. replaced Chairman and Chief Executive Mark Ernst Tuesday after
shareholders renounced his stewardship. - UPI, November 2007

Professor David Wessels

The Wharton School of the University of Pennsylvania 8
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Post-Case Actions
H&R Block
H&R Block to Cut Jobs in Spending Review Total Revenues, $ billions
H&R Block Inc., the nation's largest tax preparer, said Tuesday it plans
4.9
to cut jobs as it seeks to streamline its operations. "This review is 4.4 4.4
4.2
4.0 4.1
designed to ensure that all of our businesses and support functions have 3.7 3.9 3.8
a cost structure that helps the company to compete successfully in the 3.3

marketplace at a fair return on investment," H&R Block said in the

statement released Tuesday, adding that the changes wouldn't affect
customers. "Associates have been advised that the review and pending
realignment of our cost structure will involve position eliminations.” -
Associated Press, 2008.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

H&R Block to Acquire TaxAct for $287.5M H&R Block

Clients per Office
H&R Block has signed an agreement with 2SS Holdings to acquire 2nd 2,318
Story Software’s TaxAct tax preparation technology business for 2,040
1,931 1,918
$287.5 million in cash. “This transaction is a significant step for H&R 1,717 1,761
1,616 1,616 1,612 1,657
Block in a segment that is strategically important,” said H&R Block
president and CEO Alan Bennett in a statement. “This will provide us
with innovative growth-oriented leadership to accelerate our digital tax
offerings and results. I am looking forward to working with the TaxAct
management team on developing our multi-brand digital strategy for
the future.” - WebCPA, October 2010.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Professor David Wessels

The Wharton School of the University of Pennsylvania 9
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Session Overview
• Traditional rules of thumb about value creation can be misleading, and in some
cases harmful. We start our discussion with three important lessons:
– Lesson 1: Value is driven by growth, but not all growth is created equal

– Lesson 2: Driving towards higher multiples does not guarantee value creation

– Lesson 3: EBITDA & Earnings Per Share (EPS) often fail to measure value

• The value of a company can be traced to four key value drivers, core operating
profit, return on capital, cost of capital, and organic revenue growth.
– Value creation & the practice of finance is about evaluating tradeoffs. Although an action can
lead to an improvement in one metric like revenue growth, it may have an adverse impact on
other metrics, like return on capital.

– Every line of business, geography, customer group, distribution channel, must be thoroughly
evaluated for the potential of growth and profitability.

Professor David Wessels

The Wharton School of the University of Pennsylvania 10
 Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Lesson II: “Southeast Bank”

• Consider the following two mutually exclusive opportunities, Rural Branch & Suburban
Branch. Each requires similar investment ($250k) and similar risk. Both are one-time
opportunities and (for simplicity) have no cash flows beyond year five.
• Which opportunity is worth more? Which project would you prefer to lead?

Rural Branch Suburban Branch
Cash Flow Cash Flow
151
122
116 129
110
105
100 110
94
80

Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5

Professor David Wessels

The Wharton School of the University of Pennsylvania 11
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Total Cash Flow Drives Value

• At a 10% cost of capital, both opportunities have the same present value. If the
cost of capital is larger than 10%, cash flows today become very important, and
thus, the rural branch is more attractive. When the cost of capital is high, growth
becomes critical.

$ thousands Year 1 Year 2 Year 3 Year 4 Year 5

Profit & cash flow 100 105 110 116 122
Rural
branch Discount factor 1.10 1.21 1.33 1.46 1.61 Value
Discounted cash flow 91 87 83 79 75 415

$ thousands Year 1 Year 2 Year 3 Year 4 Year 5

Suburban Profit & cash flow 80 94 110 129 151
branch Discount factor 1.10 1.21 1.33 1.46 1.61 Value
Discounted cash flow 73 78 83 88 94 415

Professor David Wessels

The Wharton School of the University of Pennsylvania 12
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

In Search of the Higher Multiple

• The CEO of “Southeast Bank” is convinced the company’s share price is
being held back by low growth rural branches (via a low multiple). She hires
an investment bank to shop the rural branches and a high-profile private
equity shop offers $375 million for the 1,000 rural branches.

Profits = $100 million Profits = $80 million

Growth = 5% Growth = 17.5%

Rural Branches Suburban

• If the sale is used to repurchase shares, what happens to stock price and the
P/E ratio? Assume 50 million shares outstanding.

Professor David Wessels

The Wharton School of the University of Pennsylvania 13
 Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

But Does the Transaction Create Value?

Pre-Transaction Value

Mkt Value = $830 million Profits = $180 million What is the P/E
ratio of the company
Shares = 50 million Shares = 50 million prior to the
transaction?
Rural Suburban Price = $ EPS = $

Proposed Share Repurchase How many shares can

be repurchased with
Cash = $375 million new cash? To avoid
multiple value creation
Share Price = $ effects, assume
premium for purchase
is zero.
Post-Transaction Value

Mkt Value = $415 million Profits = $80 million Has the “Southeast”
CEO achieved his
Shares = Shares = goal? A higher P/E
Suburban multiple?
Price = EPS =

Professor David Wessels

The Wharton School of the University of Pennsylvania 14
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Share Price & P/E Ratio By Offer

• As expected, the resulting P/E trades above the original P/E, but does not change with
offer. It is based on the value and earnings of the remaining branches. The share price,
however, increase does increase with offer value.

P/E Analysis by Offer Price

Repurchase Remaining Original Share Resulting

Offer Potential Shares Shares Price ($) EPS ($) P/E Ratio

300 18.1 31.9 50.0 12.99 2.51 5.2

325 19.6 30.4 50.0 13.64 2.63 5.2

350 21.1 28.9 50.0 14.35 2.77 5.2

375 22.6 27.4 50.0 15.14 2.92 5.2

415 25.0 25.0 50.0 16.60 3.20 5.2

450 27.1 22.9 50.0 18.12 3.50 5.2

475 28.6 21.4 50.0 19.40 3.74 5.2

500 30.1 19.9 50.0 20.87 4.03 5.2

Professor David Wessels

The Wharton School of the University of Pennsylvania 15
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Session Overview
• Traditional rules of thumb about value creation can be misleading, and in some
cases harmful. We start our discussion with three important lessons:
– Lesson 1: Value is driven by growth, but not all growth is created equal

– Lesson 2: Driving towards higher multiples does not guarantee value creation

– Lesson 3: EBITDA & Earnings Per Share (EPS) often fail to measure value

• The value of a company can be traced to four key value drivers, core operating
profit, return on capital, cost of capital, and organic revenue growth.
– Value creation & the practice of finance is about evaluating tradeoffs. Although an action can
lead to an improvement in one metric like revenue growth, it may have an adverse impact on
other metrics, like return on capital.

– Every line of business, geography, customer group, distribution channel, must be thoroughly
evaluated for the potential of growth and profitability.

Professor David Wessels

The Wharton School of the University of Pennsylvania 16
 Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

A Model of Two Simple Companies

• Company A earns $100 million a year in after-tax profit. Part of the profit
will be reinvested in the business, the remainder distributed to investors.

$80
EBITDA Reinvested
= $180 in business
Financial Term
$50
Reinvestment Rate (IR) = 50%

EBIT (1-T)
= $100 $50
Payout Rate = 50%

Returned
to investors

Professor David Wessels

The Wharton School of the University of Pennsylvania 17
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

A Model of Two Simple Companies

• Assume the company
Company A
plans to reinvest $50
Reinvestment rate (IR) 50%
million at a 10% rate of Return on new investment 10%

return. Growth in profits 5%

• This investment leads to $ millions Year 1 Year 2 Year 3

an extra $5 million in Revenues 800.0 840.0 882.0

profits. Operating costs (700.0) (735.0) (771.8)

After‐tax operating profit 100.0 105.0 110.3
• For simplicity, we assume
all ratios, investment rate Net investment (50.0) (52.5) (55.1)

etc, never change. Free cash flow 50.0 52.5 55.1

Professor David Wessels

The Wharton School of the University of Pennsylvania 18
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Which Company is Worth More?

• Below are the characteristics and financial statements for two companies.
Compare the financial statements. Which company is worth more?

Company A Company B

Reinvestment rate (IR) 50% Reinvestment rate (IR) 25%

Return on new investment 10% Return on new investment 20%

Growth in profits 5% Growth in profits 5%

$ millions Year 1 Year 2 Year 3 $ millions Year 1 Year 2 Year 3

Revenues 800.0 840.0 882.0 Revenues 1,000.0 1,050.0 1,102.5

Operating costs (700.0) (735.0) (771.8) Operating costs (900.0) (945.0) (992.3)

After‐tax operating profit 100.0 105.0 110.3 After‐tax operating profit 100.0 105.0 110.3

Net investment (50.0) (52.5) (55.1) Net investment (25.0) (26.3) (27.6)

Free cash flow 50.0 52.5 55.1 Free cash flow 75.0 78.8 82.7

Professor David Wessels

The Wharton School of the University of Pennsylvania 19
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Difference Between Operating Margin and ROIC

• Operating margin is a critical component of return on capital, but is not
the only driver. The Power-Speed Equation describes the relationship
between margin and return on capital.

Profit Profit Revenues

 x
Capital Revenues Capital

• If Company A holds $1,000 in operating capital, and Company B

holds $500 in capital. What is the Power-Speed Equation for both
companies?

Professor David Wessels

The Wharton School of the University of Pennsylvania 20
Corporate
Corporate Strategy
Strategy and
and Valuation
Value Creation Lecture 2 -Key
KeyValue
ValueDrivers
Drivers

Driving Earnings Growth through Acquisition

• A few weeks back you joined the company’s business development group and
the big day is finally here, your first acquisition candidate. Your new boss has
asked you to evaluate the target company on both strategic and financial
rationales. In the next 20 minutes, please prepare an analysis of the target and
key issues that must be addressed.

• The CFO has asked you to take the lead on four financial analyses:

1. By how much will revenue grow?

2. By how much will operating profits grow?

3. What will happen to operating margins?

4. Is the deal EPS accretive? i.e. does earnings per share rise?

Professor David Wessels

The Wharton School of the University of Pennsylvania 21
Corporate
Corporate Strategy
Strategy and
and Valuation
Value Creation Lecture 2 -Key
KeyValue
ValueDrivers
Drivers

An Earnings-Game Example: Cendant

Cramer's 'Mad Money' Recap: Cendant

TheStreet.com Staff, April 2005
Cramer asked Silverman how his salary and
compensation -- $24 million alone in 2004 -- should
be reconciled with Cendant's stock price, which is
down 33% since he took over in 1997.
"I don't think CEO pay should be determined ... by
share price but by how you've grown your top and
bottom line," he said.
"I'm not responsible for the share price ... I'm
responsible for the earnings ," he said. Earnings
have grown at a rate "twice or three times higher
than any of the yardsticks ... we measure ourself
against," he said.

Mad Money

Professor David Wessels

The Wharton School of the University of Pennsylvania 22
Corporate
Corporate Strategy
Strategy and
and Valuation
Value Creation Lecture 2 -Key
KeyValue
ValueDrivers
Drivers

An Example: Cendant
Cendant's Credibility Problem; Why the conglomerate's plan to revive its stock has fallen flat on the Street
By Roben Farzad and Amy Barrett, Wall Street Journal

EXPENSIVE ACQUISITIONS

The reason for the lowered forecast? Tough times at Cendant's travel distribution and vehicle services divisions. Cendant
announced a $425 million charge in its travel distribution business, chiefly to write off its disastrous $350 million purchase in
2005 of Ebookers, Europe's No. 2 travel Web site. In December, management said it anticipated a charge in the range of $200
million to $300 million. Cendant also spent more than $1 billion apiece to buy out Orbitz and Gullivers Travel.

``Billions of dollars in cash flow should have been returned to shareholders,'' says Tim Fidler, director of research at Ariel
Capital Management LLC, which owns shares. Instead, the money went to expensive acquisitions.

All of which, say doubters, is destabilizing Cendant's balance sheet. Goodwill, or the amount paid for an acquisition above the
current market value, ``is turning into bad will,'' says Lee. Excluding Cendant's assets under management -- chiefly its rental
car operations, which are pledged against secured debt and therefore distanced from shareholders -- the company's goodwill
of $12 billion at yearend 2005 actually exceeded stockholders' equity of $11.3 billion, Lee calculates.

Professor David Wessels

The Wharton School of the University of Pennsylvania 23
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Drivers of Profit Growth

• Before we value the two companies, let’s examine a general relation between
IR (reinvestment rate), ROIC (return on invested capital), and g (growth).

Company A
Reinvestment Rate (IR) 50% Growth = Reinvestment x Return on Capital
Return on New Investment 10%
Growth in Profits 5%
G = IR x ROIC
Company B
Reinvestment Rate (IR) 25% Company A: 5% = 50% x 10%
Return on New Investment 20%
Company B: 5% = 25% x 20%
Growth in Profits 5%

Professor David Wessels

The Wharton School of the University of Pennsylvania 24
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Session Overview
• Traditional rules of thumb about value creation can be misleading, and in some
cases harmful. We start our discussion with three important lessons:
– Lesson 1: Value is driven by growth, but not all growth is created equal

– Lesson 2: Driving towards higher multiples does not guarantee value creation

– Lesson 3: EBITDA & Earnings Per Share (EPS) often fail to measure value

• The value of a company can be traced to four key value drivers, core operating
profit, return on capital, cost of capital, and organic revenue growth.
– Value creation & the practice of finance is about evaluating tradeoffs. Although an action can
lead to an improvement in one metric like revenue growth, it may have an adverse impact on
other metrics, like return on capital.

– Every line of business, geography, customer group, distribution channel, must be thoroughly
evaluated for the potential of growth and profitability.

Professor David Wessels

The Wharton School of the University of Pennsylvania 25
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Growing Perpetuity Formula

• A company is worth the present value of its future free cash flow. For example,
Company A can be valued as:

50 52.5 55.1
Value     .........
(1.10) (1.10) 2 (1.10) 3

• In our simple example, cash flows grow forever at a constant rate. Therefore, we
can use the growth perpetuity formula to value each company.

Cash Flow1 Cash Flow 2 Cash Flow 3

Value     .........
(1  WACC) (1  WACC)2 (1  WACC)3
via the
Growing
Cashflow1
Value  Perpetuity
WACC  g Formula

Professor David Wessels

The Wharton School of the University of Pennsylvania 26
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

What Drives Value?

Cash Flow1
Value 
WACC  g But what
determines
cash flow?
As Cash Flow rises, what happens to value?
As WACC rises, what happens to value?
As growth rises, what happens to value?

Professor David Wessels

The Wharton School of the University of Pennsylvania 27
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

Deriving the Key Value Driver Formula

• In order to develop the key value driver formula, we will rely on two
simple substitutions.

 g 
Profit 1  
Cash Flow1 Profit(1  IR)  ROIC 
Value   
WACC  g WACC  g WACC  g

Substitution #1 Substitution #2
Cash Flow = Profit (1 – IR) Growth = IR x ROIC

Professor David Wessels

The Wharton School of the University of Pennsylvania 28
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Key Value Driver Formula

Company A

 g 
Profit 1  
Value   ROIC 
WACC  g

Company B
Terminology used by Consulting Firms

Profit – After-tax Operating Profit (NOPAT/NOPLAT )

ROIC - Return on Invested Capital (ROI/RONIC/ROCE/RONA)

WACC - Weighted Average Cost of Capital (Hurdle Rate)

g – Long term growth in profit and cashflows

Professor David Wessels

The Wharton School of the University of Pennsylvania 29
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

How Growth Drives Value

• In 1995, two well-known Fortune 100 companies generated nearly $20 billion
in revenue. Since then, one company has grown dramatically. Which
company is the high-growth company? A or B?

Aggregate Revenues
1995‐2014 Company A
125 Enterprise value ($ billions) 204.6
Enterprise to EBITDA (x) 16.4
10.1%
100 Return on capital 40.0%

75
Company B
$ billions

Enterprise value ($ billions) 49.3
50 5.1% Enterprise to EBITDA (x) 10.4
Return on capital 14.3%
25

0
Source: Thomson Worldscope, First Call, Apr‐15
1995 1998 2001 2004 2007 2010 2013

Professor David Wessels

The Wharton School of the University of Pennsylvania 30
 Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

International Resource Allocation

• You sit in corporate headquarters
evaluating international expansion International Expansion Plans
proposals. Algeria (whose Algeria versus Belgium

characteristics mirror company A) and 1,600

1,500 Belgium
Belgium (whose characteristics mirror
1,400 @ 10% 
company B) are presenting their margins
1,300
proposals. 1,200
Algeria
• Algeria can increase projected growth 1,100
1,000
@ 12.5% 
from 5% to 8% while Belgium can margins
900
increase it from 5% to 6%. If both 800
countries require the same resources to 700
1 2 3 4 5 6 7
accelerate growth and headquarters can
only fund one plan, which should it
choose?

Professor David Wessels

The Wharton School of the University of Pennsylvania 31
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

International Resource Allocation

• Algeria can increase projected growth from 5% to 8% while Belgium can increase
it from 5% to 6%. If both countries require the same resources to accelerate growth
and headquarters can only fund one plan, which should it choose?

Algeria

Value = 1,000 New Value =

Belgium

Value = 1,500 New Value =

Professor David Wessels

The Wharton School of the University of Pennsylvania 32
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

What Drives Value?

 g 
Profit 1  
Value   ROIC 
WACC  g

As starting Profit rises, what happens to value?

As ROIC rises, what happens to value?
As WACC rises, what happens to value?
As growth rises, what happens to value?

Professor David Wessels

The Wharton School of the University of Pennsylvania 33
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Growth/Value Matrix

• As we will show later, if the spread between ROIC and WACC is
positive, new growth creates value.
• The market value of a company, with a starting Profit of $100 million,
and a 10% cost of capital, is as follows:

ROIC
7.5% 10.0% 12.5% 15.0%

2% $917 1,000 1,050 1,083

Growth 4% 778 1,000 1,133 1,222

6% 500 1,000 1,300 1,500

Professor David Wessels

The Wharton School of the University of Pennsylvania 34
Corporate Strategy and Valuation Lecture 2 - Key Value Drivers

The Value of Alternative Strategies

ROIC
7.5% 10.0% 12.5% 15.0%

2% $917 1,000 1,050 1,083

Growth 4% 778 1,000 1,133 1,222

6% 500 1,000 1,300 1,500

• Assume your company earns a 15% return on invested capital, while growing
at 2%. The new CEO has argued the company should grow faster, even if it
means some sacrificing financial performance. What do you think?
• Assume your company earns a 10% return on invested capital, while growing
at 6%. The new CEO has argued the company should focus on higher profit
customers, even if it means reducing growth. What do you think?

Professor David Wessels

The Wharton School of the University of Pennsylvania 35