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 Sity’s market to book ratio (MBR)?
c. Given that another company, Pity plc, was founded with £l5m 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.