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?

  • CreatedMarch 27, 2015
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