1 advocates of the shareholder value approach argue that by

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Reference no: EM13381755

1 Advocates of the shareholder value approach argue that, by delivering consistent and sustainable improvements in shareholder value, a business will benefit several stakeholder groups. The performance of a business such as the Stagecoach Group plc, which is committed to maximising shareholder value, may be used to support their arguments. Key elements of the income statement for the Stagecoach Group for the year to 30 April 201 0 are set out below.

Required

Fill out the right-hand column below to show how advocates of the shareholder value approach

might seek to identify the stakeholder groups that benefit from the business's operations.

£m Stakeholders that benefit

Revenue 2,1 64.4

Operating costs 1 ,947.2

Finance costs 41 .5

Taxation 27.2

Profit for the year 134.1

2 Aries plc was recently formed and issued 80 million £0.50 shares at nominal value and loan capital of £24m. 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 £1 2 million each year. At the end of the three years, the business will be wound up and the lease will have no residual value.

The required rate of return by investors is 1 2 per cent.

Required:

Calculate the expected shareholder value generated by the business over the four years,

using:

(a) The SVA approach

(b) The EVA approach.

3.Leo plc is considering entering a new market. A new product has been developed at a cost of £5 million and is now ready for production. The market is growing and estimates from the finance department concerning future sales of the new product are as follows:

Year Sales

£m

1 30.0

2 36.0

3 40.0

4 48.0

5 60.0

After Year 5, sales are expected to stabilise at the Year 5 level.

You are informed that:

? The operating profit margin from sales in the new market is likely to be a constant 20 per cent of sales revenue.

? The cash tax rate is 25 per cent of operating profit.

? Replacement non-current asset investment (RNCAI) will be in line with the annual depreciation charge each year.

? Additional non-current asset investment (ANCAI) over the next five years will be 1 5 per cent of sales growth.

? Additional working capital investment (AWCI) over the next five years will be 1 0 per cent of sales growth.

The business has a cost of capital of 12 per cent. The new market is considered to be no more risky than the markets in which the business already has a presence.

Required:

Using an SVA approach, indicate the effect of entering the new market on shareholder value.

Reference no: EM13381755

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