By: Level13
Competitive advantage period (CAP) is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital. Economic theory suggests that competitive forces will drive returns down to the cost of capital over time. If a company earns above market required returns, it will attract competitors that will accept lower returns, eventually driving industry returns lower. The notion of CAP has been around for some time; nonetheless, not much attention has been paid to it in the valuation literature. The equation can be summarized as follows:
Value = (NOPAT/WACC) + [I(R-WACC)CAP]/(WACC)(1+WACC)
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Competitive advantage period (CAP) — Part 1