Question

It is April 2018 and Mark is a novice investor who wants to decide between purchasing shares in Eagle Corp or Myna Bird Inc. In fiscal year 2017, Eagle Corps return on invested capital (ROIC) was 15 percent, and its cost of capital was 12 percent. During the same period, Myna Bird Inc.'s ROIC was 22 percent and its cost of capital was 25 percent. What does this information tell Mark

Answer 1

Answer:

Eagle Corp is more likely to create value while Myna Bird Inc. is more likely to destroy value

Explanation:

Given that,

In Eagle Corps,

Return on invested capital (ROIC) = 15%

Cost of capital = 12%

In Myna Bird Inc.,

Return on invested capital (ROIC) = 22%

Cost of capital = 25%

By Investing in Eagle Corps,

= 15% - 12%

= 3%

By Investing in Myna Bird Inc.,

= 22% - 25%

= -3%

Above information tell Mark that by investing in Eagle Corps he can get the positive returns of 3% whereas by investing in Myna Bird Inc. he can get the negative returns of 3%.

Therefore, Eagle Corp is more likely to create value while Myna Bird Inc. is more likely to destroy value.