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# Calculating MVA and EROIC

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KFS has two divisions. Both have current sales of \$1,000, current expected growth of 5%, and a WACC of 10%. Division A has high profitability (OP = 6%) but high capital requirements (CR = 78%). Division B has low profitability (OP = 4%) but low capital requirements (CR = 27%).

1. What is the MVA of each division, based on the current growth of 5%?
2. What is the MVA of each division if growth is 6%?
3. What is the EROIC of each division for 5% growth and for 6% growth?
4. How is this related to MVA?

#### Solution Preview

Please refer attached file for better clarity of tables. Formulas typed with the help of equation writer are missing here.

Solution:
1. What is the MVA of each division, based on the current growth of 5%?
Division A
Sales =\$1000
Expected growth rate=5%
WACC=10%
OP=6%
CR=78%
MVA=(1000*1.05/(10%-5%))*(6%-(10%*78%/1.05))=-\$300

Division B
Sales =\$1000
Expected growth rate=5%
WACC=10%
OP=4%
CR=27%
MVA=(1000*1.05/(10%-5%))*(4%-(10%*27%/1.05))= \$300

2. What is the MVA of each division if growth is 6%?

Division A
Sales =\$1000
Expected growth ...

#### Solution Summary

Solution describes the steps to calculate MVA, and EROIC.

\$2.19
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c. Calculate operating profitability (OP = NOPAT/Sales), capital requirements (CR = Operating capital/Sales), and expected return on invested capital (EROIC = Expected NOPAT/Operating capital at beginning of year). Based on the spread between EROIC and WACC, do you think that the company will have a positive Market Value Added (MVA = Market value of company ? Book value of company = Value of operations ? Operating capital)?
d. Calculate the value of operations and MVA. (Hint: First calculate the horizon value at the end of the forecast period, which is equal to the value of operations at the end of the forecast period.) Assume that the annual growth rate beyond the horizon is 6%.
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