edf40wrjww2CF_PaperMaster:Desc
A) Rogel’s plans are forecasted to yield a ROCE of 16.1% for 1999 – only 0.9% short away from the 17% goal.
B) The value of the share, based on the plans, would be $30.38.
22.63 + (0.93/0.12)
This value is much lower than the market value of Weyerhaeuser ($55).
C) Utilization of capacity increases earnings due to operating leverage. Since fixed costs usually remain the same throughout the period, increasing production output and increased sales will contribute to added revenue to the ‘bottom line’. Therefore, even small increases in sales can cause significant increase in income growth due to leverage.
D) Some reservations to keep in mind about incorporating the forecasts of higher return on equity in our valuation are:
a. The forecasted ROCE is significantly higher than historical data. The forecasted amount is 16.1% where as previous year was only 6.4%. This is a 151% increase over one year.
b. The excess capacity at the company is of some concern as it is uncertain whether the plant would be written off, or has a more speedy depreciation after implementing the plan. This may cause ROCE to decrease.
As well, at the peak of the demand cycle, Weyerhaeuser can choose to reinvest to build new plants to meet demand, but can run into the temptation of overinvesting.
c. Does increasing the amount of trees harvested more beneficial in the short-term while Rogel tries to reach his goal of obtaining ROCE of 17%, thus sacrificing long-term benefits?
E) &n ...