When a company has an ROIC greater than its cost of capital,faster growth increases value,but when it has an ROIC less than its cost of capital,what is the effect on value?
A)Faster growth creates value.
B)Faster growth destroys value.
C)Growth doesn't impact value creation.
D)None of the above are true.

Question

Quizplus · Accepted Answer

When a company has an ROIC less than its cost of capital, faster growth does not create value and can actually destroy value. This is because the company is not earning enough on its investments to cover its cost of capital, and faster growth will require additional investment, further reducing the spread between ROIC and cost of capital. As a result, the company will either need to take on additional debt or equity financing, which will add more costs and reduce the value of the company.

When a Company Has an ROIC Greater Than Its Cost