Suppose that growth is accelerating and increases to 5% without deteriorating the performance (economic profit is stable at 12 with an EBIT of 30).

Calculate the new MVA from discounted economic profit.

The formula was: MVA = EP / (WACC – g)

Let’s go back to a 3% growth, but suppose that EBIT is down to 12 (instead of 30 previously).

What is the new value of economic profit?

Calculate the MVA with a 3% growth

Now calculate the MVA with a 5% growth.

What is the impact of growth on value creation?

Let’s go back to the calculation from FCF and an EBIT which is 30

First, we use the formula FCF = EBIT * (1 – CTR) – g*CE

What is the impact of a growth rate up from 3% to 5%?

What is the impact of the same growth increase on the “multiplier” 1 / (WACC – g)?

Check that the enterprise value you get multiplying the new FCF by the new multiplier is the same as the one you calculated in question 1.

Let’s use now the formula:

FCF = EBITDA * (1 – CTR) + CTR * Depreciation – Capex – DWCR

Calculate the FCF with a 5% growth rate and the same level of capital expenditures.

You notice that the result is different, as the company must invest more today to increase its production capacity and face higher sales growth.

Let’s take the assumption, often confirmed by empirical observation, that the Assets Turn-Over (ATO = sales / capital employed) is stable. Then, if sales grow at 5%, CE should grow at the same rate.

First, calculate the absolute increase in CE.

As capital employed absolute growth comes from WCR growth plus increase in non-current assets (fixed assets, net of accumulated depreciation), calculate the capital expenditures which make CE grow as calculated in question 9.

Calculate the Free Cash-Flow again with the new Capex figure