fm15 11 - The opposite is true if the spread is negative j...

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Mini Case: 15 - 11 h. What are the four value drivers? How does each of them affect value? Answer: MVA is determined by four drivers: sales growth, operating profitability (OP=NOPAT/sales), capital requirements (CR=operating capital / sales, and the weighted average cost of capital. MVA will improve if WACC is reduced, operating profitability (OP) increases, or the capital requirement (CR) decreases. See the next question for an explanation of the impact of growth. i. What is return on invested capital (ROIC)? Why is the spread between ROIC and WACC so important? Answer: ROIC is the return on the capital that is in place at the beginning of the period: t 1 t 1 t Capital NOPAT ROIC + + = If the spread between the expected return, ROIC t+1 , and the required return, WACC, is positive, then MVA is positive and growth makes MVA larger.
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Unformatted text preview: The opposite is true if the spread is negative. j. 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%). What is the MVA of each division, based on the current growth of 5%? What is the MVA of each division if growth is 6%? Answer: Division A Division B OP 6% 6% 4% 4% CR 78% 78% 27% 27% Growth 5% 6% 5% 6% MVA (300.0) (360.0) 300.0 385.0 ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ ⎟ ⎟ ⎠ ⎞ ⎜ ⎜ ⎝ ⎛ + − ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ − + = ) g 1 ( CR WACC OP g WACC ) g 1 ( Sales MVA t t...
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