Question 4

International plc was recently formed and issued 120 million 0.50 shares at par and loan capital of 28m. The business used the proceeds from the capital issues to purchase the remaining lease on some commercial properties 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 15 million each year. At the end of the four years, the business will be wound up and the lease will have no residual value. Assume straight-line depreciation. The required rate of return by investors is 14 per cent.

Required:

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

1. The Shareholders Value Added (SVA) approach (13 marks)
2. The Economic Value Added (EVA) approach (12 marks)

2. Discuss four adjustments that the EVA calculations typically make to conventional financial statements. (8 marks)