11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Ryker , your newly appointed boss, has tasked you with evaluating the following financial data for Extensive Enterprise fne to determine how Extensive's value has changed over the past year. The Investment firm for which you work will make a positive for "buy recommendation to its Investing clients if Extensive's value has increased over the past year, a neutral (or "hold") recommendation if the value has remained constant, or negative (or "sel) recommendation of the value has decreased. He has recommended that you use unveral metries to ascertain how the firm's value has changed, and he has provided you with the following income statement and balance sheet. External enterprise Inc. Income fatement January 1 December 31, Year Year 2 Year! Sales 13.675,000 2,040,000 5735.000 $3,500,000 2,170,000 actory 5610,000 Bxpenses EBITDA Depreciation and writion expense EBIT 122.500 1605,375 110,250 Interest egen TIST 37.500 5420.000 3-096.125 198,40 The expense (406 Tuntom 160.000 $352,000 397.625 Coman viden $170.105 3151.200 06: Assignment - Accounting for Financial Management Extensive Enterprise Inc. Income Statement January 1 - December 31, Year 2 Year 2 Year 1 Sales $3,675,000 $3,500,000 Expenses 2,940,000 2,870,000 EBITDA $735,000 $630,000 Depreciation and amortization expense 128,625 122,500 EBIT $606,375 $507,500 Interest expense 110,250 87,500 $496,125 $420,000 EBT Tax expense (40%) Net income 198,450 168,000 $297,675 $252,000 $178,605 $151,200 Common dividends Addition to retained earnings Excludes depreciation and amortization $119,070 $100,800 Extensive Enterprise Inc. Balance Sheet December 31, Year 2 Assets: Year 2 Year 1 Cash and cash equivalents $249,375 $199,500 Receivables 831,250 665,000 Inventory 1,454,688 1,163,750 Current assets $2,535,313 $2,028,250 Net fixed assets 1,620,937 1,296,750 Total current assets $4,156,250 $3,325,000 Liabilities and Equity: Accounts payable $623,438 $498,750 Accruals 405,234 324,188 Notes payable 872,813 698,250 Total current liabilities $1,901,485 $1,521,188 Long-term debt 800,078 640,063 Total liabilities $2,701,563 $2,161,250 Common stock ($1 par) 290,937 232,750 Retained earnings 1.163,750 931,000 Total equity $1,454,687 $1,163,750 Total liabilities and equity $4,156,250 $3,325,000 Shares outstanding 290,937 232,750 Weighted average cost of capital 7.981 7.3096 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 $100, 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 Metries Sales $3,500,000 $3,675,000 5297,675 Net income 252,000 $374,500 et cash flow (NCF) 16 31.506,541 $1.00 50.61 55.00 0.00 Net operating working capital (NOWC) Earrings per share (EPS) Dividende pershor (DPS) Book value pershtare (V) Cash flow per share (CPS) Market pricepershan V CC in HLV Market woofer 30 uctory 3.54 51.100 1 Market Value Added (MA) EVA Calculation Tutorating profitant (VA) ca Company Growth and Performance Metrics Metric Year 2 Year 1 Percentage Change General Metrics $3,675,000 $3,500,000 % $297,675 % $252,000 $374,500 % $1,506,641 96 $1.08 % $0.61 % $5.00 0.00% -8.70% Sales Net Income Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) Cash flow per share (CFPS) Market price per share MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) EVA Calculation Net operating profit after-tax (NOPAT) Investor-supplied operating capital Weighted average cost of capital $21.73 $19.75 % 37.53% $1,454,687 96 $1,163,750 $3,433,063 %% $363,825 $ 25.00% 7.98% 7.30% Dollar cost of capital $ 36.64% 90 Return on invested capital (ROIC) Economic Value Added (EVA) 96 $114,157 Using the change in extensive's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A hold recommendation A buy recommendation A sell recommendation Which of the following statements are correct? Check all that apply. For any given year, one way to compute Extensive's EVA is as the difference between Its NOPAT and the product of its operating capital and its weighted average cost of capital Extensive's NCF is calculated by adding its annuel depreciation and amortization expense to the corresponding year's EBITDA. Other things remaining constant, Extensive's EVA will increase when its ROIC exceeds its WACC. Extensive'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 its costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm, Cl Investor supplied operating capital is recorded as accounts payable, accruals, and short-term investments Extensive Enterprise Inc. Income Statement January 1 - December 31, Year 2 Year 2 Year 1 Sales $3,675,000 $3,500,000 Expenses 2,940,000 2,870,000 EBITDA $735,000 $630,000 Depreciation and amortization expense 128,625 122,500 EBIT $606,375 $507,500 Interest expense 110,250 EBT $496,125 87,500 $420,000 168,000 $252,000 Tax expense (40%) 198,450 Net income $297,675 Common dividends $178,605 $ 151,200 $119,070 $100,800 Addition to retained earnings Excludes depreciation and amortization Balance Sheet December 31, Year 2 Assets: Year 2 Year 1 Cash and cash equivalents $249,375 $199,500 Receivables 831,250 665,000 Inventory 1,454,688 1,163,750 Current assets $2,535,313 $2,028,250 Net fixed assets 1,296,750 1,620,937 $4,116,250 Total current assets $3,325,000 Liabilities and Equity: Accounts payable $623,438 $498,750 Accruals 405,234 324,188 Notes payable 872,813 698,250 Total current liabilities $1,901,485 Long-term debt $1,521,188 640,063 800,078 Total liabilities $2,161,250 $2,701,563 290,937 1,163,750 Common stock ($1 par) Retained earnings Total equity Total liabilities and equity Shares outstanding Weighted average of capital 232.750 931,000 $1.163.750 11.454.687 $4,156,250 $3,325,000 290,937 232.750 2:30 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 $100, round your answer to two decimal places. If your answer is negative use a minus (-) sign.) Metric Year 1 Percentage Change Year 2 General Metrics $3,675,000 $297,675 % $3,500,000 $252,000 $374,500 96 % $1,506,641 $ % $ $1.08 % $0.61 $5.00 0.0096 -8.70% $21.73 $19.75 96 Sales Net income Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BUPS) Cash flow per share (CFPS) Market price per share MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) 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) $ 37.53% $1,454,687 $1,163,750 $ $3,433,063 36 $363,825 $ 5 5 25.00 7.98% 7.30 36.641 $114,157 Using the change in Extensive's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A hold recommendation A buy recommendation A sell recommendation Which of the following statements are correct? Check all that apply. For any given year, one way to compute Extensive's EVA is as the difference between its NOPAT and the product or its operating capital and its weighted average cost of capital. Extensive's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA Other things remaining constant, Extensive's EVA will increase when its ROIC exceeds its WACC. Extensive'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 its costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm. Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments