Question

a. Equation 15.7 shows that market value added (MVA) of an investment project is the present value of the stream of the future economic value added (EVA) of the project. Because a firm can be viewed as a basket of investment projects, the MVA of a firm is simply the present value of the stream of future EVA generated by the firm from these projects. Show that the market value of a firm's capital is equal to the present value (PV) of the stream of future EVA expected from the firm plus its invested capital:
Market value of capital = PV of expected future EVA + Invested capital
b. Consider Value Inc. The firm's invested capital is $150 million, and the market value of its capital is also $150 million, so its MVA is equal to zero. Suppose that the firm announces a $50 million investment in a project from which it expects a return on invested capital of 14 percent for the next four years.
Value Inc.'s weighted average cost of capital is 8 percent. By how much should the market value and the MVA of the firm increase at the announcement of the project?


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  • CreatedMarch 27, 2015
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