Will improvements in the long-term growth rate of sales always add value? Explain your answer.

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Will improvements in the long-term growth rate of sales always add value? Explain your answer.

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Will improvements in the long-term growth rate of sales always add value? Explain your answer.

Explanation & AnswerSolution by a verified expert

Explanation

The major increase in value of a firm mainly depends on its return on invested capital (ROIC). Value addition can be done on the basis of whether the project is new or old.
 
A new project having a high growth rate may also add negative value to the firm because of low ROIC in the initial years.
 
In case of old projects, if ROIC from a project is more than its weighted average cost of capital (WACC) at a given point of time, it will add positive value but if ROIC is less than WACC, it will add negative value to the firm even though sales are growing rapidly.

Verified Answer

Long term growth rate will not always add value to the firm. It will only add value when the return on invested capital of a firm is more than its weighted average cost of capital.

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