Question

Comprehenively explain how the value of a business depends on who is managing it and what strategy they pursue. Different owners will generate different cash flows for a given business based on their unique ability to add value.

Answer 1

Apart from management strategy and operational efficiency driving the growth of a company, financial strategy drive the value of the firm for the same level of return (before interest and taxes) on capital employed.

If the Ke i.e. cost of equity is higher than the after tax cost of debt, then it is better to issue debt in order to fund projects. This will enhance the value of the firm.

Different owners generate different cashflows depending upon their ability as some focus on ramping up sales thorugh aggressive marketing i.e. they focus more on topline whereas some focus more on profitability i.e. they focus more on bottomline.