10. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Josh, your newly appointed boss, has tasked you with evaluating the following financial data for Atherton Corp. to determine how Atherton's value has changed over the past year. The investment firm for which you work will make a positive (or "buy") recommendation to its investing clients if Atherton's value has increased over the past year, a neutral (or "hold") recommendation if the value has remained constant, or a negative for "sell") recommendation if the value has decreased. He has recommended that you use several metrics to ascertain how the firm's value has changed, and he has provided you with the following income statement and balance sheet. Atherton Corp. Income Statement January 1 - December 31, Year 2 Year 2 Year 1 Sales $1,200,000 $1,000,000 960,000 820,000 Expenses EBITDA Depreciation and amortization expense $240,000 $180,000 35,000 42,000 $198,000 36,000 $145,000 EBIT 25,000 Interest expense $162,000 $120,000 EBT 48,000 Tax expense (40%) 64,800 $97,200 $72,000 Net income $58,320 $43,200 Common dividends $38,880 $28,800 Addition to retained earnings Excludes depreciation and amortization Atherton Corp. Balance Sheet December 31, Year 2 Assets: Year 2 Year 1 $76,950 $57,000 256,500 190,000 448,875 332,500 $782,325 $579,500 w 500,175 370,500 $950,000 $1,282,500 Cash and cash equivalents Receivables Inventory Current assets Net fixed assets Total current assets Liabilities and Equity: Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock ($1 par) $192,375 $142,500 125,044 92,625 269,325 199,500 $434,625 $586,744 182,875 246,881 $833,625 89,775 $617,500 66,500 89,775 66,500 266,000 Common stock ($1 par) Retained earnings Total equity Total liabilities and equity Shares outstanding Weighted average cost of capital 359,100 $448,875 $1,282,500 $332,500 $950,000 89,775 66,500 7.98% 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. (Note: Round all percentage change answers to two decimal places. If a dollar value is below 5100, round your answer to two decimal places. If your answer is negative use a minus (-) sign.) Company Growth and Performance Metrics Metric Year 2 Year 1 Percentage Change General Metrics Sales $1,200,000 $1,000,000 Net Income $97,200 $72,000 Net cash flow (NCF) $107,000 Het operating working capital (NOWC) $464,906 Earnings per share (EPS) 51.08 Dividends per share (DPS) 50.6 Book value per share (BVPS) $5.00 0.00% Cash flow per share (CFPS) -3.73% Market price per share $22.71 $19.75 96 96 $ $ 96 $ $ 9 Metric Year 2 Year 1 Percentage Change $ $ 55.23% MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) $448,875 $332,500 % $ $980,875 % Year 2 Year 1 Percentage Change $118,800 $ 35.00% Metric EVA Calculation Net operating profit after-tax (NOPAT) Investor supplied operating capital Weighted average cost of capital Dollar cost of capital Return on invested capital (ROIC) Economic Value Added (EVA) 7.98% 7.30% $ $ 47.579 Yo 9 1.15% $41,788 Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A buy recommendation A sell recommendation A hold recommendation Which of the following statements are correct? Check all that apply. For any given year, one way to compute Atherton's EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital Atherton's net income is growing at a rate greater than its sales, This could imply that either its revenues are growing more quickly than Its expenses or that management is being effective in managing is costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm. Atherton's NCF is calculated by adding its annual interest expense to the corresponding year's net income. Other things remaining constant, Atherton's EVA will increase when its ROIC exceeds its WACC. Investor supplied operating capital is recorded as accounts payable, accruals, and short-term investments 10. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Josh, your newly appointed boss, has tasked you with evaluating the following financial data for Atherton Corp. to determine how Atherton's value has changed over the past year. The investment firm for which you work will make a positive (or "buy") recommendation to its investing clients if Atherton's value has increased over the past year, a neutral (or "hold") recommendation if the value has remained constant, or a negative for "sell") recommendation if the value has decreased. He has recommended that you use several metrics to ascertain how the firm's value has changed, and he has provided you with the following income statement and balance sheet. Atherton Corp. Income Statement January 1 - December 31, Year 2 Year 2 Year 1 Sales $1,200,000 $1,000,000 960,000 820,000 Expenses EBITDA Depreciation and amortization expense $240,000 $180,000 35,000 42,000 $198,000 36,000 $145,000 EBIT 25,000 Interest expense $162,000 $120,000 EBT 48,000 Tax expense (40%) 64,800 $97,200 $72,000 Net income $58,320 $43,200 Common dividends $38,880 $28,800 Addition to retained earnings Excludes depreciation and amortization Atherton Corp. Balance Sheet December 31, Year 2 Assets: Year 2 Year 1 $76,950 $57,000 256,500 190,000 448,875 332,500 $782,325 $579,500 w 500,175 370,500 $950,000 $1,282,500 Cash and cash equivalents Receivables Inventory Current assets Net fixed assets Total current assets Liabilities and Equity: Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock ($1 par) $192,375 $142,500 125,044 92,625 269,325 199,500 $434,625 $586,744 182,875 246,881 $833,625 89,775 $617,500 66,500 89,775 66,500 266,000 Common stock ($1 par) Retained earnings Total equity Total liabilities and equity Shares outstanding Weighted average cost of capital 359,100 $448,875 $1,282,500 $332,500 $950,000 89,775 66,500 7.98% 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. (Note: Round all percentage change answers to two decimal places. If a dollar value is below 5100, round your answer to two decimal places. If your answer is negative use a minus (-) sign.) Company Growth and Performance Metrics Metric Year 2 Year 1 Percentage Change General Metrics Sales $1,200,000 $1,000,000 Net Income $97,200 $72,000 Net cash flow (NCF) $107,000 Het operating working capital (NOWC) $464,906 Earnings per share (EPS) 51.08 Dividends per share (DPS) 50.6 Book value per share (BVPS) $5.00 0.00% Cash flow per share (CFPS) -3.73% Market price per share $22.71 $19.75 96 96 $ $ 96 $ $ 9 Metric Year 2 Year 1 Percentage Change $ $ 55.23% MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) $448,875 $332,500 % $ $980,875 % Year 2 Year 1 Percentage Change $118,800 $ 35.00% Metric EVA Calculation Net operating profit after-tax (NOPAT) Investor supplied operating capital Weighted average cost of capital Dollar cost of capital Return on invested capital (ROIC) Economic Value Added (EVA) 7.98% 7.30% $ $ 47.579 Yo 9 1.15% $41,788 Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A buy recommendation A sell recommendation A hold recommendation Which of the following statements are correct? Check all that apply. For any given year, one way to compute Atherton's EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital Atherton's net income is growing at a rate greater than its sales, This could imply that either its revenues are growing more quickly than Its expenses or that management is being effective in managing is costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm. Atherton's NCF is calculated by adding its annual interest expense to the corresponding year's net income. Other things remaining constant, Atherton's EVA will increase when its ROIC exceeds its WACC. Investor supplied operating capital is recorded as accounts payable, accruals, and short-term investments