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C 1 7 MAGING FOR VALU CREATION 615 17.3 Market value added analysis The International Logis Com e buying an inventory rol software program that will so 140.000 de l ed and installed include personnel train aming). The program will allow them to reduce inventory $100,000. The cost of the sofware will b e the year it is bought ject to a 40 percen percent corporate tax rate and its we verage cost of capital percent. Should ILC buy the software che question using econom value added and market value added analysis. 17.4 Market value added analysis of the designer deskamp project. Refer to Chapter 9 forder t he designer desklamp project. Pons the cash flows the proc e d a te. Use the information in exhibit to estimate the project's econom wal a mate the project's so The latter, if measured correctly, mus and its market value added. casured correctly, must be equal to the project's net present value of 5415,083. The weighted average cost of capital is 7.6 percent 17.5 The financial strategy matrix. Amalgamated Industries (AI) has fed Industries (AI) has four distinct business divisions that are run as companies and are listed on a stock market. Alhas a majority ownership f companies for which the following financial data have been collected: Food Beverages Transportation Restaurants e designer desklamp project. Exhibit 9.3 in the four Company Sales growth rate Return on invested capital Return on equity Veighted average cost of capital ividend payout ratio 8% 12% 10% 15% 15% 20% 12% 40% 7% 8% 12% 4% 13% 15% 11% 60% 99 50% 25% a. Position the four companies on the financial strategy matrix. b. What actions should Al take regarding each of these businesses? EVIEW QUESTIONS 1. Understanding market value added and economic value added. Explain why each of the following statements is generally incorrect: a. "The firm with the highest market value is the one that has created the most value for its shareholders." b. "If a firm's market value added (MVA) is positive, then its current return on invested capital (ROIC) must exceed its weighted average cost of capital (WACC)." C. "Growth is the key to increasing a firm's MVA." d. "This year's economic value added (EVA) is positive, so the firm's market value added must also be positive." e. "Giving managers a bonus related to their ability to increase the profitability (ROIC) of their business unit is one way to enhance shareholder value