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The value-driver formula

A firm creates value only when ROIC > WACC. With constant growth g, NOPAT and a constant ROIC, the plough-back rate is g / ROIC and the value is V = NOPAT·(1 − g/ROIC) / (WACC − g). Compare it with the no-growth value NOPAT / WACC: growth lifts the value above the benchmark only when ROIC clears the cost of capital, and drags it below when ROIC falls short.

Enterprise value V$1555.6m
$0m$1146m$2292m$3438m$4583m0%2%4%6%8%Growth rate g (%)Enterprise value V ($m)no-growth value$1555.6mV vs g (ROIC, WACC fixed)no-growth value
Reinvestment rate g/ROIC 22.2%Value spread ROIC − WACC +9.0%
NOPAT (year 1)$100m
Growth rate g4.0%
ROIC18.0%
WACC9.0%
ROIC (18.0%) clears WACC (9.0%), so each dollar reinvested earns more than it costs. Value $1555.6m sits +$444.4m above the no-growth benchmark $1111.1m: growth creates value, and faster growth creates more.
Try this

Hold g fixed and slide ROIC across WACC. Above WACC the gold curve rises with g; below it the curve turns rose and falls; exactly at WACC it lies flat on the no-growth line.

Reflect: a fast-growing firm with ROIC below its WACC is worth less than if it stopped growing entirely. Why, then, do markets sometimes reward growth for its own sake, and how long can a firm sustain ROIC above WACC before competition closes the gap?

Value Creation: ROIC versus WACCOpen in Dr Phil's Quant Lab ↗