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Other questions:

What would determine (or influence) the fade rate for sales growth for a firm? How would an external analyst estimate this fade rate?

UNARTICULATED STRATEGY:
As an outside analyst, how could you determine if the firm has an unarticulated strategy?

SCENARIO ANALYSIS:
What benefits are likely to accrue to a manager when scenario analysis is undertaken in conjunction with computing enterprise value?

DIFFERENT QUESTIONS:

1. Profit margin is one of the two most important variables that drive residual operating income. What can a company do to increase the profit margin? How has Gardner Denver attempted to keep its profit margin from fading to the industry norm?

2. Asset turnover is another one of the two most important variables that drive residual operating income. What can a company do to increase its asset turnover? How has Gardner attempted to keep this ratio from fading to the norm?

3. Focusing on change was the second of the four points mentioned. RNOA is a driver of value that fades over time. Assume that you Abercrombie and Fitch and are at 16% and the industry mean is 11%. Discuss one macroeconomic variable that could drive this 16% towards 20%.

4. Again, assume that you Abercrombie and Fitch and are at 16% and the industry mean is 11%. Discuss one industry variable that could drive this 16% towards 11%.

Solution Preview

What would determine (or influence) the fade rate for sales growth for a firm? How would an external analyst estimate this fade rate?
The fade rate for sales growth is determined by decline in the ratios of the company. When the company sales ratio starts declines then it is said that the sales growth of the company is fading and the rate with which it declines is called the fader rate of sales growth.
Following are the areas that help the external analyst to determine the fade rate of sales growth for a company:
(i) If the fade rate of sales growth rate is zero, then the sales ratio falls linearly.
(ii) If the fade rate of sales growth rate is greater than zero, the curve falls fast initially and then slows down.
(iii) If the fade rate of sales growth rate is less than zero, the curve falls slowly initially, and then the curve falls rapidly towards the end of the period.

As an outside ...

Solution Summary

Fade rates, asset turnover and RNOA is examined.

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