You are an equity analyst and have computed the following figures for two cement companies.The first,CementCo,has NOPLAT of $1,550 million,invested capital without goodwill of $15,000 million,and goodwill of $1,950 million.The second,CementExports,has NOPLAT of $1,750 million,invested capital without goodwill of $16,000 million,and no goodwill.If the cost of capital for both firms is 10 percent,what is the ROIC for each company? Which company is creating value in this year?
A)ROIC excluding goodwill is 10.3 percent for CementCo and 10.9 percent for CementExports;both companies are creating value.
B)ROIC including goodwill is 9.1 percent for CementCo and 10.9 percent for CementExports;both companies are creating value.
C)ROIC including goodwill is 9.1 percent for CementCo and 10.9 percent for CementExports;only CementExports is creating value.
D)ROIC including goodwill is 9.1 percent for CementCo and 10.9 percent for CementExports;neither of the companies is creating value.

Question

Quizplus · Accepted Answer

ROIC = NOPLAT/Invested capital
For CementCo:
ROIC excluding goodwill = 1,550/15,000 = 10.3%
ROIC including goodwill = 1,550/(15,000 + 1,950) = 9.1%
For CementExports:
ROIC excluding and including goodwill (as there is no goodwill) = 1,750/16,000 = 10.9%
One should include goodwill, as this required an outlay by the firm.

You Are an Equity Analyst and Have Computed the Following