Question
Sity plc has paid out all earnings as dividends since it was founded with 15m of equity finance 25 years ago. Today its shares are
Sity plc has paid out all earnings as dividends since it was founded with 15m of equity finance 25 years ago. Today
its shares are valued on the stock market at 90m and its long-term debt has a market value and book value of 20m.
a How much market value added (MVA) has Sity produced?
b What is Sitys market to book ratio (MBR)?
c Given that another company, Pity plc, was founded with 15m of equity capital five years ago and has paid out all earnings since its foundation and is now worth (equity and debt) 110m (90m equity, 20m debt), discuss the problems of using the MVA and the MBR for inter-firm comparison.
d Calculate the excess return (ER) for both Sity and Pity given that the required rate of return for Sity is 8 per cent per year and the required rate of return is 10 per cent per year for Pity. Sity has paid only two dividends: 2m was paid five years ago and 3m was paid three years ago. Pity has paid 2m in dividends at the end of every year since its foundation.
e Discuss the advantages and disadvantages in using the MVA and ER to judge managerial performance.
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