A firm has the following summary balance sheet (in millions of dollars): Net operating assets............441 Net financial

Question:

A firm has the following summary balance sheet (in millions of dollars):

Net operating assets............441

Net financial obligations........... 52

Common shareholders’ equity........389

The firm is currently earning a return on net operating assets (RNOA) of 14 percent from sales of $857 million and after-tax operating income of $60 million. Its required return on operations is 10 percent. Forecasts indicate that RNOA is likely to continue at the same level in the future with growth in sales of 3 percent per year and growth in net operating assets to support the sales of 3 percent per year.

Management is considering a plan to introduce new products that are expected to increase the sales growth rate to 4 percent a year and maintain the current profit margin of 7 percent. But the plan will require additional investment in net operating assets that will reduce the firm's asset turnover to 1.67.

What effect will this plan have on the value of the firm?

Asset Turnover
Asset turnover is sales divided by total assets. Important for comparison over time and to other companies of the same industry. This is a standard business ratio. Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...