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Management article
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Reference no. 84108
Published by: Harvard Business Publishing
Published in: "Harvard Business Review", 1984
Length: 10 pages

Abstract

Examination of the interaction among inflation, capital costs, profitability, growth, and the market value of a company''s common stock can determine whether growth adds value for a company''s shareholders. Analysis of the expected excess returns, figured on a net present value basis, of Tandy Corp., Xerox, and National Steel illustrates how the gap between market and book value of common stock can widen and illustrates that growth will add value if ROE is expected to exceed the cost of equity capital. But inadequate profitability coupled with the need to finance inflation-induced sales growth can be disastrous for the company''s valuation.

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Abstract

Examination of the interaction among inflation, capital costs, profitability, growth, and the market value of a company''s common stock can determine whether growth adds value for a company''s shareholders. Analysis of the expected excess returns, figured on a net present value basis, of Tandy Corp., Xerox, and National Steel illustrates how the gap between market and book value of common stock can widen and illustrates that growth will add value if ROE is expected to exceed the cost of equity capital. But inadequate profitability coupled with the need to finance inflation-induced sales growth can be disastrous for the company''s valuation.

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