sunflower international is operating in a country that has over the past year gone through a...
sunflower international is operating in a country that has over the past year gone through a phase of significant deflation. If you were comparing the real and nominal return on invested cap ROIC you would expect that:
A. Real ROIC and nominal would equal
B. real ROIC > nominal ROIC
C, real ROIC < nominal ROIC
D. can’t compare
Homework Answers
Option C. Real ROIC < nominal ROIC.
ROIC = (EBIT - Taxes)/Invested Capital
Deflation is the state when prices have dropped and inflation rate <0. When prices will drop, assuming no abnormal increase in sales numbers, the revenue will go down.
The invested capital is a historical value, it will not change with deflation. However as revenue goes down, so will EBIT. A decrease in EBIT will cause the numerator to go down hence ROIC will go down.
Assumptions: The deflation is seen by the same percentage amount in revenue as well as expenses and interest expense and tax rate remains constant.
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