valueexceedsthevalueofcontinuinginthebusiness;ifitis,
divestituremakessense.Afterall,whenabusinessisearning
poorreturns,itisunlikely thata potentialbuyer willpaya
premium price for it.
3 Acquisitions have to be considered as part of capital
expendituresforreinvestment.Thus,itisrelativelyeasyfor
firmstoincreasetheirreinvestmentratesbutverydifficultfor
these firms to maintain high returns on capital as they do so.
4 Outsourcing and more flexible wage contracts, both
phenomenathathavebeenwidelyreportedonoverthepast
decade,canbeviewedasattemptsbyfirmsto reducetheir
fixed costs.
5 Studieslookingatconglomeratesconcludethattheytradeat
adiscountofbetween 5 and 10 percentonthevalueofthe
pieces that they are composed of.
6 Theprocessofcomputing thecostofequity anddebtat
differentdebtratiosisdescribedindetailinmybookApplied
Corporate Finance(John Wiley & Sons, 2nd ed., 2004).
7 Tocomputethereinvestmentrate,weuseareturnoncapital
of 7.50 percent in perpetuity:
8 D. Del Guercio and J. Hawkins, “The Motivation and
Impact of Pension Fund Activism,” Journal of Financial
Economics52 (1999).