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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?

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Solution Summary

Solution describes the steps to calculate MVA, and EROIC.

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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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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