in2004,ascompetitionhasincreasedbothfromonlinerentals
(Netflix) and from discount retailers (Wal-Mart). The
companyearnedareturnoncapitalof4.06%onitsexisting
assetsin 2004 whileitscostofcapitalwas6.17%.Evenifwe
assume that thereturnon capital onnew investments will
graduallyincrease tothecost ofcapitalleveloverthenext
fiveyears,wearriveatavaluefortheequityof$955million
and a value per share of only $5.13 (shown inFigure 13.4).
FIGURE 13.4Blockbuster: Status Quo
So, how would we restructure Blockbuster? The first and
most important component is increasing the returns on
existingassetsto atleastthecostofcapitalof6.17%.This
willrequireeithergeneratingmoreoperatingincome(ithasto
increaseto$381.76million)orreleasingsomeoftheexisting
capital tied up in the poorest-return assets (which would
require more than $1 billion in divestitures). If we also