DefenseCo announces a purchase of Gulf Aviation for $1.1 billion in cash. Consequently, Gulf Aviation’s invested capital with goodwill and acquired intangibles rises from $600 to $1.1 billion. Next year, while conducting its annual review of Gulf Aviation, senior management at DefenseCo asks you the following questions: Based on the profitability figures presented in Question 1, is Gulf Aviation creating value for DefenseCo? Which company, JetCo or Gulf Aviation, has the best financial performance in the industry?
Question 1: JetCo is a manufacturer of high speed aircraft. The company generates $100 million in operating profit on $600 million of revenue and $800 million of invested capital. JetCo’s primary competitor Gulf Aviation also generates $100 million in NOPLAT. Gulf Aviation is slightly larger; the company recorded $800 million in revenue. Gulf Aviation has $600 million in invested capital. Based on the preceding data, which company is creating more value? Assume an operating tax rate of 25 percent and cost of capital of 8 percent.
Please show calculations