Problem 6 - SVA and EVA

Aries plc was recently formed and issued 40 million 0.50 shares at par (that is, for 20 million in total) and loan notes of 12 million. The business used the proceeds from the capital issues to purchase the remaining lease on some commercial properties for 32 million that are rented out to small businesses. The lease will expire in four years' time and during that period the annual operating profits are expected to be 12m each year. At the end of the four years, the business will be wound up and the lease will have no residual value.

The required rate of return by investors is 10 per cent.

Calculate the expected shareholder value generated by the business over the four years, using:

• the SVA approach
• the EVA approach