A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth of 5%,...

Question:

A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth of 5%, and a WACC of 10%.

What is its value of operations? What is its intrinsic MVA?

EROIC:


EROIC stands for Expected return on invested capital. Thus, it differs from WACC in the sense that WACC is basically required return on invested capital. Hence, to earn profit, EROIC has to be greater than WACC.

Answer and Explanation:


Value of operations = {eq}Initial\;cost+ \left ( \left \{ \frac{Initial cost}{WACC-g}\right \}\times (EROIC-WACC) \right ) {/eq}

= {eq}200M+ \left ( \left \{ \frac{200M}{0.10-0.05}\right \}\times (0.09-0.10) \right ) {/eq}

=$160M


Intrinsic MVA = Value of operations - Initial cost

= $160M - $200M

= -$40M


Thus, market value added is negative


Learn more about this topic:

Loading...
Required Rate of Return (RRR): Formula & Calculation

from Financial Accounting: Help and Review

Chapter 1 / Lesson 29
37K

Related to this Question

Explore our homework questions and answers library