Question 11.Act.8: What can managers do in order to increase EVA®? (Hint: Use t...

Financial Management for Decision Makers

What can managers do in order to increase $EVA^\circledR$ ? (Hint: Use the formula shown above as your starting point.)

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The formula suggests that to increase $EVA^\circledR$ , managers should try to:

increase NOPAT – this may be done by either reducing expenses or increasing sales
use capital invested more efficiently – this means selling off assets that are not generating returns which exceed their cost and investing in assets that do
reduce the required rates of return for investors – this may be achieved by changing the capital structure in favour of borrowing (which is cheaper to service than share capital).
This strategy can create problems, however, as discussed in Chapter 8 .

Related Answered Questions

Question: 11.Act.3

Libra plc has an estimated terminal value (representing cash flows beyond the planning horizon) of £100 million. What is the present value of this figure assuming a discount rate of 12 per cent and a planning horizon of: (a) 5 years (b) 10 years (c) 15 years? (Hint: You may find it helpful ...

Verified Answer:

The answers are: (a) £100m × 0.567 = £56.7 million...

Question: 11.5

Cosmo plc began trading ten years ago. It has 2 million £1 ordinary shares in issue that have a current market value of £5 per share. These shares were issued at their nominal value when the business was founded. The business also has £6 million 10 per cent loan notes. The book value of the loan ...

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The market value added can be calculated as follow...

Question: 11.4

Leo Ltd has just been formed and has been financed by a £20 million issue of share capital and a £10 million issue of loan notes. The proceeds of the issue have been invested in non-current assets with a life of three years and during this period these assets will depreciate by £10 million per year ...

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The SVA approach to determining shareholder value ...

Question: 11.1

Sagittarius plc generated sales of £220 million during the year and has an operating profit margin of 25 per cent of sales. Depreciation charges for the year were £8.0 million and the cash tax rate for the year was 20 per cent of operating profit. During the year, £11.3 million was invested in ...

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The free cash flows are calculated as follows: ...

Question: 11.3

Scorpio plc was established two years ago and has produced the following statement of financial position and income statement at the end of the second year of trading. Discussions with the finance director reveal the following:1. Marketing costs relate to the launch of a new product. The benefits ...

Verified Answer:

The first step in calculating

EVA^\circledR...

Question: 11.Act.9

Can you work out the EVA® for the second year of Scorpio plc in Example 11.3 ? ...

Verified Answer:

EVA^\circledR

can be calculated as ...

Question: 11.Act.10

Calculate the EVA margin for the second year of Scorpio plc in Example 11.3. ...

Verified Answer:

The ratio is:

EVA margin=\frac{£8.9m}{£148...

Question: 11.Act.5

What is the shareholder value figure for the business in Example 11.2? Would the sale of the shares at £11 per share really add value for the shareholders of Bortex plc? ...

Verified Answer:

Shareholder value will be the total business value...

Question: 11.S-AQ.1

Romeo plc produced the following statement of financial position at the end of the third year of trading:An analysis of the underlying records reveals the following: 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, ...

Verified Answer:

Romeo plc Adjusted net assets (capital investe...

Question: 11.RQ.4

It has been argued that many businesses are overcapitalised. If this is true, what may be the reasons for businesses having too much capital and how can EVA® help avoid this problem? ...

Verified Answer:

If businesses are overcapitalised it is probably b...