- Genericoperatingmarginapproach.Inthisapproach,
wereplacetheoperatingmarginofthebrand name
firmwiththeoperatingmarginofgenericcompanies
inthesamebusiness.Theimplicitassumptionthatwe
makeisthatthepowerofabrandnameliesinpricing
productsandthatbrandnamecompanieswillbeable
to charge higher prices for identical products
producedbygenericcompanies.Revaluingthebrand
namecompanywithagenericmarginwillhaveripple
effects,sincelowermarginsbegetlowerreturns on
capitaland lowerreturns oncapital resultinlower
growthrates.Asaconsequence,evenasmallchange
inoperatingmargincantranslateintoalargechange
invalue, whichcanthenbe attributedtothebrand
name. - Genericreturnoncapitalapproach.Aclosesubstitute
forthefirstapproachinvolvesreplacingthereturnon
capitalofthebrandnamecompanybythereturnon
capitalofagenericsubstitute.Here,weareassuming
thatthepowerofabrandnameultimatelywillshow
up in higher returns on capital.
6 The resulting changes in operating income and
growthwillreducethevalueofthecompany,andthe
changeinvalueisthebrandnamevalue.Implicitly,
weareassumingthatthecostsofcapitalarethesame
for both the generic and the brand name company. - Genericexcessreturnapproach.Inthisapproach,we
replacethe excess returns (returnon capitalminus
costofcapital)earnedbythebrandnamecompany
bytheexcessreturnsearnedbythegenericcompany.
In addition to capturing all of the effects that
changing the return on capital has on value, this
approach allows us to set the costs of capital at
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