Question 11.S-A.1: Cupid plc produced the following balance sheet at the end of...
Cupid plc produced the following balance sheet at the end of the third year of trading:
Statement of financial position (balance sheet) as at the end of the third year
| £m | |
| Non-current assets | |
| 60.0 | Property |
| 90.0 | Computing equipment |
| \underline{22.0} | Motor vehicles |
| \underline{172.0} | |
| Current assets | |
| 39.0 | Inventories |
| 53.0 | Receivables |
| \underline{12.0} | Cash |
| \underline{104.0} | |
| \underline{276.0} | Total assets |
| Equity | |
| 60.0 | £1 ordinary shares |
| \underline{81.0} | Retained earnings |
| \underline{141.0} | |
| Non-current liabilities | |
| 90.0 | Loan capital |
| Current liabilities | |
| \underline{45.0} | Trade payables |
| \underline{276.0} | Total equity and liabilities |
An analysis of the underlying records reveals the following:
1 R&D costs relating to the development of a new product in the current year had been written off at a cost of £10 million. However, this is a prudent approach and the benefits are expected to last for ten years.
2 Property has a current value of £200 million.
3 The current market value of an ordinary share is £8.50.
4 The book value of the loan capital reflects its current market value.
Required:
Calculate the MVA for the business over its period of trading.
Adjusted net assets (capital invested)
| £m | £m | |
| 231.0 | Total assets less | |
| current liabilities as | ||
| per the statement of financial position | ||
| 140.0 | Add Property (£200m − £60m) | |
| \underline{149.0} | \underline{9.0} | R&D (9/10 × £10m) |
| \underline{380.0^*} | Adjusted total assets less current liabilities |
* This figure represents the adjusted figure for share and loan capital.
Market value added calculation
| £m | |
| 510.0 | Market value of shares (60m × £8.50) |
| (\underline{380.0}) | Less Capital invested (see above) |
| \underline{130.0} | MVA |