21. (Refer to the INSIGHTS box on pages 94–95 before attempting this problem.

Notice that the calculations called for here do not involve cost of capital.)

William Edwards, Inc. (WEI) had one million shares of common stock outstanding on 12/31/20X0. The stock had been sold for an average of $8.00 per share and had a market price of $13.25 per share on that date. WEI also had a balance of $5.0 million in its retained earnings account on that date. The following projection has been made for WEI’s next five years of operations:

Compute the MVA as of 12/31/X0, and compute EVA®, the change in MVA, as a result of each subsequent year’s activity. (Assume that all shares issued during any given year received the dividends declared that year.) Comment on management’s projected performance over the five-year period. What would you do if you represented a majority of the stockholders? Would the result have been different before MVA/EVA analysis?

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Shares Average Stock Price Year Net Income Dividends/Share Issued Issue Price 12/31 20X1 $700,000 $.20 None NA $13.75 20X2 840,000 .22 50,000 $14.00 14.25 20X3 750,000 .24 100,000 13.50 13.80 20X4 900,000 .26 50,000 14.50 15.00 20X5 860,000 .28 None NA 15.40