Explore BrainMass
Share

Calculating MVA and EROIC

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

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?

© BrainMass Inc. brainmass.com October 16, 2018, 10:57 pm ad1c9bdddf
https://brainmass.com/business/weighted-average-cost-of-capital/calculating-mva-and-eroic-239997

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
Similar Posting

Chapter 13: Corporate Valuation, Value-Based Management and Corporate Governance

I am stumped and need some help. I would like you to do the entire problem but PLEASE show all your work so I can understand what is necessary to learn to do this. The word doc is the problem and the Excel doc is the template I would like it finished in.

Start with the partial model in the file Ch13 P11 Build a Model.xls on the textbook's Web site. The Henley Corporation is a privately held company specializing in lawn care products and services. The most recent financial statements are shown below. Income Statement for the Year Ending December 31 (Millions of Dollars Except for Per Share
Data)

a. Forecast the parts of the income statement and balance sheet that are necessary for calculating free cash flow.
b. Calculate free cash flow for each projected year. Also calculate the growth rates of free cash flow each year to ensure that there is constant growth (that is, the same as the constant growth rate in sales) by the end of the forecast period.
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%.
e. Calculate the price per share of common equity as of 12/31/2010.

View Full Posting Details