Question #7 - Reading 23 Residual Income Valuation

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 4

Status: Unattempted

Correct Answer: A

Shared Context

- Calculate Retty's Market Value Added (MVA) for 20x6. A) $9.3 million. B) $12.5 million. C) $50.5 million.

Question

Which of the following statements would be most likely to explain a decrease in MVA for 20x7?

Answer Choices:

A. The market expectation is that Retty’s results will show an underperformance relative to its sector

B. In 20x6 the management produce negative Economic Value Added (EVA®)

C. The market expectation is that Retty’s future Economic Value Added (EVA®) is lower than the previous expectation

Explanation

MVA can be described as the present value of future expected EVA®. Hence, actual performance in 2x06 (answer B) is not a valid explanation. Answer A is also wrong, as relative performance is not relevant. If Retty's WACC decreases, then, all else being equal, the MVA will increase.

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