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How Valuations are Related to Return on Capital?
Valuation of a firm is dependent on what excess return it is generating or will generate for its stakeholders. Value of the firm can be explained as: Value of the Firm = Book Value + Value of Excess Return on the historical and new investment It means the firm creates value for its stakeholders by
Its not just equity, debt also has market value
Like equity, debt also has market value which may be different from its book value. Market value of debt depends upon the current interest rate applicable for the similar kind of debt in the market. In other words, difference between market value and book value of the debt is dependent upon the difference between book