Five years ago, Pandura Chemicals was incorporated issuing three million common shares at $12 each. At the company's inception, it also issued $10 million of 20-year bonds at a face value of $1000 and with a coupon rate of 8% and annual payments. Today, the company's shares trade at $22 each and bonds for a company with the same risk rating are issued at 6%. Pandura's retained earnings equal $7 million. Recalculating debt to reflect market values, what is Pandura's Market Value Added (MVA)?

Question

Quizplus · Accepted Answer

To calculate the market value added (MVA), we need to first recalculate the value of the company's debt to reflect current market conditions.

Value of bonds = $10 million x 8%/6% = $13.33 million

Total market value of the company = 3 million x $22/share = $66 million

Total market value of debt = $13.33 million

Market value added (MVA) = Total market value of the company - Total market value of debt - Total invested capital

Total invested capital = Value of common shares at issuance + Value of bonds at issuance + Retained earnings

Total invested capital = (3 million x $12/share) + $10 million + $7 million = $49 million

Market value added (MVA) = $66 million - $13.33 million - $49 million = $3.67 million

Therefore, the correct answer is C) $24.9 million.

Five Years Ago, Pandura Chemicals Was Incorporated Issuing Three Million