Thiscashflowwillreflecthowefficientlythefirmmanages
these assets.
2.Expectedgrowthrateduringextraordinarygrowthperiod.
Thevalue of a firmshould be a function of theexpected
growthrateinoperatingincome.AsdescribedinChapter4,
thefundamentalsthatdrivegrowth aresimple,and growth
itselfhastwopartstoit.Thefirstcomponentisgrowthfrom
new investments, which is the product of a firm’s
reinvestment rate (i.e., the proportion of the after-tax
operatingincomethatisinvestedinnetcapitalexpenditures
andchangesinnoncashworkingcapital),andthequalityof
thesereinvestments, measuredby thereturn onthe capital
invested.
Thesecondcomponentisthegrowthfrommanagingexisting
investments more efficiently. The additional growth from
generating a higher return on capital from existing
investments can be written as follows:
If the improvement in return on capital on existing
investmentsoccursovermultipleyears,thisgrowthratehas
to be spread over the period.
1 Thekeydifferencebetweenthetwocomponentsofgrowth
liesintheirsustainability.Growthfromnewinvestmentscan
continueinthelongterm,aslongasthecompanycontinues