As the chief financial officer for her firm, Sara Bertram poured over reams of computer printouts provided by her subordinates. Clearly, considerable effort had been expended to develop a preliminary estimate of the value of a potential acquisition target. As a publicly traded company, substantial financial detail on the target was available. Four financial analysts had labored feverishly through the weekend to collect the data necessary to project cash flows. These cash flows, along with other measures of value, were used to determine the "economic value" of the target firm. By all accounts, the analysis seemed rigorous and complete. She should have been satisfied. Yet something was lacking.

Sara was having considerable difficulty understanding why projected revenue for the target firm was expected to grow at more than twice the pace of working capital. Similarly, forecasts of capital spending seemed to lag the expected robust growth of the potential acquisition target. Moreover, operating margins were growing throughout the forecast period. The combination of these factors caused the target's projected cash flow to escalate at an unprecedented rate. Were sales growing because of an anticipated improvement in market share? Perhaps improved inventory controls were contributing to a reduction in working capital per dollar of sales during the forecast period. Moreover, it wasn't clear why capital spending should not at least grow at its historical rate. Could expected improvements in productivity account for the improvement in operating profit margins? Frustrated, Sara summoned the financial...