investors, thus pushing up value. Table 9.6 examines the
impactofchangingthereturnoncapitalwhilekeepingthe
expected growth rate and the cost of capital fixed in
Illustration 9.2.
TABLE 9.6Return on Capital and EV Multiples
Note that thereinvestment rate needed to sustain a given
growth rate (9 percent) increases as the return on capital
decreases.Ata 6 percentreturnoncapital,forexample,the
reinvestmentrateinthefirstfiveyearsis 150 percent(toget
toa 9 percentgrowthrate)andafteryear 5 itis66.67percent
(tosustainthestablegrowthrateof 4 percent).Asthereturn
oncapitalincreases,theenterprisevaluemultiplesincreaseas
well.
Theenterprisevalue-to-investedcapitalratio,inparticular,is
heavilydependent ontheexcessreturnearnedbythefirm,
withexcess returndefinedasthedifferencebetweenreturn
and cost of capital. Figure 9.4 summarizes the effect of
changingtheexcessreturnontheenterprisevalue-to-nvested
capital ratio.