Exhibit 3: Alternative Calculation of Shareholder Value Added (SVA) Year NOPAT A NOPAT A NOPAT capitalized PVA NOPAT capitalized Σ PV of A NOPAT capitalized Investment PV of investment Shareholder value added Source: Counterpoint Global. Base 1 100.0 108.0 2 116.6 3 126.0 4 5 6 7 8 9 10 11 136.0 8.0 114.3 8.6 123.4 9.3 133.3 106.8 10.1 10.9 11.8 144.0 155.5 167.9 107.8 108.8 109.8 110.9 111.9 146.9 158.7 171.4 185.1 12.7 13.7 181.4 195.9 211.5 112.9 114.0 115.1 199.9 215.9 14.8 16.0 Sum 228.5 Inflows 116.1 1,114.1 Sum 32.0 29.9 34.6 37.3 30.2 30.5 40.3 43.5 47.0 50.8 30.8 31.0 31.3 31.6 54.8 59.2 31.9 32.2 64.0 32.5 Outflows 312.0 Inflows Outflows =Total SVA 76.9 77.6 78.3 79.1 79.8 80.6 81.3 82.1 82.8 83.6 802.2 Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; A=change in; Σ=sum of. We are now ready to solve for MEROI, which is the discount rate at which the present value of the incremental NOPAT inflows equals the present value of the investment outflows discounted at the cost of capital. Exhibit 4 shows that we need a 16.2 percent rate in order for the present value of incremental NOPATS to equal the present value of investments. Since 16.2 percent is well above the cost of capital of 7 percent, we know that the PVGO is positive. © 2024 Morgan Stanley. All rights reserved. Morgan Stanley | INVESTMENT MANAGEMENT Exhibit 4: Calculation of Market-Expected Return on Investment (MEROI) Year Base 1 2 6642569 Exp. 05/31/2025 4 COUNTERPOINT GLOBAL 3 4 5 6 7 8 9 10 Present value of investments (outflows) discounted at the cost of capital Investment PV of investment 32.0 34.6 37.3 40.3 29.9 30.2 30.5 30.8 43.5 47.0 31.0 31.3 50.8 54.8 59.2 64.0 31.6 31.9 32.2 32.5 Σ PV of Investment 312.0 Present value of NOPAT (inflows) discounted at the MEROI NOPAT 100.0 108.0 116.6 126.0 136.0 146.9 158.7 171.4 185.1 199.9 215.9 A NOPAT 8.0 8.6 9.3 10.1 10.9 11.8 12.7 13.7 14.8 16.0 A NOPAT capitalized PVA NOPAT capitalized 49.3 53.3 42.4 57.5 62.1 67.1 72.5 78.3 84.5 91.3 98.6 39.4 36.7 34.1 31.7 29.4 27.3 25.4 23.6 21.9 Σ PV of A NOPAT capitalized 312.0 Market expected return on investment 16.2% Source: Counterpoint Global. Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; Σ=sum of; A=change in.

Exhibit 3: Alternative Calculation of Shareholder Value Added (SVA) Year NOPAT A NOPAT A NOPAT capitalized PVA NOPAT capitalized Σ PV of A NOPAT capitalized Investment PV of investment Shareholder value added Source: Counterpoint Global. Base 1 100.0 108.0 2 116.6 3 126.0 4 5 6 7 8 9 10 11 136.0 8.0 114.3 8.6 123.4 9.3 133.3 106.8 10.1 10.9 11.8 144.0 155.5 167.9 107.8 108.8 109.8 110.9 111.9 146.9 158.7 171.4 185.1 12.7 13.7 181.4 195.9 211.5 112.9 114.0 115.1 199.9 215.9 14.8 16.0 Sum 228.5 Inflows 116.1 1,114.1 Sum 32.0 29.9 34.6 37.3 30.2 30.5 40.3 43.5 47.0 50.8 30.8 31.0 31.3 31.6 54.8 59.2 31.9 32.2 64.0 32.5 Outflows 312.0 Inflows Outflows =Total SVA 76.9 77.6 78.3 79.1 79.8 80.6 81.3 82.1 82.8 83.6 802.2 Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; A=change in; Σ=sum of. We are now ready to solve for MEROI, which is the discount rate at which the present value of the incremental NOPAT inflows equals the present value of the investment outflows discounted at the cost of capital. Exhibit 4 shows that we need a 16.2 percent rate in order for the present value of incremental NOPATS to equal the present value of investments. Since 16.2 percent is well above the cost of capital of 7 percent, we know that the PVGO is positive. © 2024 Morgan Stanley. All rights reserved. Morgan Stanley | INVESTMENT MANAGEMENT Exhibit 4: Calculation of Market-Expected Return on Investment (MEROI) Year Base 1 2 6642569 Exp. 05/31/2025 4 COUNTERPOINT GLOBAL 3 4 5 6 7 8 9 10 Present value of investments (outflows) discounted at the cost of capital Investment PV of investment 32.0 34.6 37.3 40.3 29.9 30.2 30.5 30.8 43.5 47.0 31.0 31.3 50.8 54.8 59.2 64.0 31.6 31.9 32.2 32.5 Σ PV of Investment 312.0 Present value of NOPAT (inflows) discounted at the MEROI NOPAT 100.0 108.0 116.6 126.0 136.0 146.9 158.7 171.4 185.1 199.9 215.9 A NOPAT 8.0 8.6 9.3 10.1 10.9 11.8 12.7 13.7 14.8 16.0 A NOPAT capitalized PVA NOPAT capitalized 49.3 53.3 42.4 57.5 62.1 67.1 72.5 78.3 84.5 91.3 98.6 39.4 36.7 34.1 31.7 29.4 27.3 25.4 23.6 21.9 Σ PV of A NOPAT capitalized 312.0 Market expected return on investment 16.2% Source: Counterpoint Global. Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; Σ=sum of; A=change in.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 1Q: Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt,...

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