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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