The Takeaways

Assets-in-Place

• The assets in place reflect investments that a business has already made. The investments were made in the past, but the value that is attached to them is your estimate of what they will generate for you in the future.

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These are the already-operating parts of the business — the factories, product lines, software platforms, customer bases, licenses — that are generating cash right now or will continue doing so with minimal additional investment.

We try to estimate:
“How much free cash flow will this asset generate in the future?”

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✅ Examples by Company:

1. Microsoft

• Assets in place:

  • Microsoft Office Suite (Word, Excel, PowerPoint)

  • Azure cloud infrastructure already deployed

  • LinkedIn network and monetization channels

• Why they matter:
  Microsoft Office still generates billions in cash flow annually from renewals and subscriptions. Even though Office was built decades ago, its value today is the future recurring revenue from Office 365 subscriptions.

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2. McDonald’s

• Assets in place:

  • Existing restaurants and drive-thrus

  • Franchise agreements (royalties)

  • Brand and real estate holdings

• Why they matter:
  These assets already produce stable income — every restaurant contributes to system-wide cash flows, and McDonald’s collects royalties with no new capital required.

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3. Apple

• Assets in place:

  • iPhone production & supply chain

  • Installed base of 1B+ devices

  • Apple Store ecosystem

• Why they matter:
  Apple doesn’t start from scratch each year — people already own iPhones and use the App Store, generating recurring high-margin revenue via services.

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4. Netflix

• Assets in place:

  • Existing subscriber base

  • Content library (e.g., Stranger Things, The Crown)

  • Platform infrastructure

• Why they matter:
  These allow Netflix to generate subscription revenue with relatively low marginal cost. Even older content still earns money every month.

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Assets in place = Stuff the company already owns/operates that’s generating (or will generate) cash flow.

Growth Assets

• Definition: Future investments a company will make, valued today by the present value of the excess returns those investments are expected to generate.
• Excess return = (Return on New Investment) − (Cost of Capital)

Debt

1. Contractual Payment Obligations

   • You must make periodic interest payments (e.g., semi‑annual coupons) and eventually return the principal at maturity.

2. Default Risk & Priority

   • If you miss an interest or principal payment, lenders can force bankruptcy or seize collateral.

   • Priority: In a liquidation, debt holders get paid before equity holders.

3. Tax Advantages of Debt

   • Interest is tax‑deductible in most jurisdictions, reducing your taxable income (“interest tax shield”).

   • This makes the “after‑tax cost” of debt cheaper than equity.

Why Interest Is Tax‑Deductible

• Operating vs. Financing Costs: Taxes are levied on taxable income, which is defined as

$$\text{Taxable Income}=\text{Operating Profit}-\text{Interest Expense}-\text{Other Deductions}$$

• Policy Rationale: Governments generally allow businesses to deduct interest to avoid “double taxation” of debt financing and to encourage investment.

Equity

• Equity = Residual claim
  • You own what remains after all bills are paid.

• Dividends = Cash you receive
  • Managers choose how much of that leftover to pay you now.

The correct answer to the question:

Which of the following is the best way of estimating the value of assets in place?

e. A discounted cash flow valuation of the company with no growth

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✅ Here’s Why:

• Assets in place refer to the cash flows a company can generate from its existing operations, without assuming any future growth.

• A DCF with no growth isolates just the value of those current operations. It assumes:

$$\text{Value of assets in place}=\frac{\text{Cash Flow}}{\text{Discount Rate (Cost of Capital)}}$$

• This gives you a clean, fundamental estimate of what the business is worth if it just keeps doing what it does today — no new projects, no expansion, no innovation.

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❌ Why the Others Are Less Suitable:

• a. Book value = accounting numbers, not economic value.

• b. Market cap = value of equity only (not full firm), includes growth expectations.

• c. Enterprise value = market-based and includes growth potential.

• d. Multiples (like EV/EBITDA) = reflect both current performance and growth expectations built into market prices.

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So the best answer is:

e. A discounted cash flow valuation of the company with no growth.

The correct answer to:

Which of the following statements best describes the value of growth assets?

d. Companies that reinvest more and earn a high return on capital on those investments will have a higher value for growth assets

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🔍 Here’s why:

The value of growth assets depends on two key factors:

1. How much the company reinvests (Reinvestment Rate)

2. How effectively it reinvests (Return on Capital, or ROC)

If a company reinvests heavily but earns a low return, it destroys value.
If it reinvests wisely and earns a high return, it creates value.

This is captured by the formula:

$$\text{Value of Growth}=\text{FCF from assets in place}+\left(\text{Reinvestment Rate}\times \text{Return on Capital}-\text{Cost of Capital}\right)$$

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❌ Why the others are wrong:

• a. Value of growth assets is not always > 0 — if return < cost of capital, growth can destroy value.

• b. Reinvesting more doesn’t help unless you earn high returns on it.

• c. High return is great — but without reinvestment, it doesn’t generate growth.

• e. Expected earnings/revenue growth alone can be misleading if costs or reinvestment needs are too high.

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So the best, most complete answer is:

d. Companies that reinvest more and earn a high return on capital on those investments will have a higher value for growth assets.