since the growth effect can be offset by changes
elsewhereinthevaluation.Thus,higherreinvestment
ratesusuallyresultinhigherexpectedgrowthbutat
the expense of lower cash flows, since more
reinvestmentreducesfreecashflowsatleastinthe
near term.
3 Totheextentthatthereturnoncapitalonthenew
investments is higherthan the cost of capital, the
value of the business will increase as the
reinvestmentraterises.Similarly,higherreturns on
capitalalso causeexpectedgrowth toincrease, but
valuecanstillgodownifthenewinvestmentsarein
riskier businesses and there is a more than
proportionate increase in the cost of capital.- Withexistingassets,theeffectismoreunambiguous,
withhigherreturnsoncapitaltranslatingintohigher
growth and higher value. A firm that is able to
increaseitsreturnoncapitalonexistingassetsfrom 2
percent to 8 percent over the next five years will
report healthy growth and higher value.
Whichofthesetwoavenuesoffersthemostpromiseforvalue
creation?Theanswerwilldependonthefirminquestion.For
maturefirmswithlowreturnsoncapital(especiallywhenless
thanthecostofcapital),extractingmoregrowthfromexisting
assetsislikelytoyieldquickerresults,atleastintheshort
term.Forsmaller firmswith relativelyfewassets inplace,
generatingreasonablereturns,growthhastocomefromnew
investmentsthatgeneratehealthyreturns(higherthanthecost
of capital).
Lengthen the Period of High Growth