11. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) Aa Asher, 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 (or "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 Atherton Corp Balance Sheet December 31, Year 2 Assets: Cash and cash equivalents Receivables Inventory Year 1 $5,750,000 $5,000,000 4,100,000 900,000 175,000 725,000 125,000 600,000 240,000 $360,000 $216,000 144,000 Year 2 Year 2 $356,250 1,187,500 2,078,12!5 3,621,875 2,315,625 $5,937,500 Year 1 $285,000 950,000 1,662,500 2,897,500 1,852,500 $4,750,000 Expenses1 4,600,000 1,150,000 201,250 948,750 172,500 776,250 310,500 $465,750 EBITDA Depreciation and amortization expense Current assets Net fixed assets Interest expense Total assets Liabilities and Equity: Accounts payable Accruals Notes payable $890,625 578,906 $712,500 463,125 997,500 2,173,12!5 914,375 3,087,500 332,500 1,330,000 1,662,500 $4,750,000 332,500 Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization $279,450 186,300 2,716,406 1,142,969 3,859,375 415,625 1,662,500 Total current liabilities Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity Total debt and equity $5,937,500 Shares outstanding Weighted average cost of capital 415,625 Shares outstanding Weighted average cost of capital 332,500 30% 415,625 To facilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to two decimal places Company Growth and Performance Metrics Using the change in Atherton's EVA as the decision Percentage criterion, which type of investment recommendation Change should you make to your clients O A hold recommendation O A sell recommendation O A buy recommendation Metric Year 2 Year 1 General Metrics 15.00% 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 $5,750,000 $5,000,000 $360,000 $535,000 $465,750 Which of the following statements are correct? Check all that apply $2,152,344 $1.08 Atherton's NCF is calculated by adding its annual interest expense to the corresponding year's net income $0.67 $5.00 0.00% 0.00% For any given year, one way to compute $21.23 $19.75 Atherton's EVA is as the difference between its NOPAT (such as $435,000) and the product of its operating capital ($3,574,375) and its weighted average cost of capital ($7.30) Other things remaining constant, Atherton's EVA will increase when its ROIC exceeds its WACC. MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) 34.37% $2,078,125 $1,662,500 $4,904,375 EVA Calculation An increase in the number of common shares 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) $569,250 outstanding must increase the market value of the firm's equity 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 its costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm 25.00% 7.98% 7.30% 36.64% 4.68% $212,675 11. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) Aa Asher, 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 (or "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 Atherton Corp Balance Sheet December 31, Year 2 Assets: Cash and cash equivalents Receivables Inventory Year 1 $5,750,000 $5,000,000 4,100,000 900,000 175,000 725,000 125,000 600,000 240,000 $360,000 $216,000 144,000 Year 2 Year 2 $356,250 1,187,500 2,078,12!5 3,621,875 2,315,625 $5,937,500 Year 1 $285,000 950,000 1,662,500 2,897,500 1,852,500 $4,750,000 Expenses1 4,600,000 1,150,000 201,250 948,750 172,500 776,250 310,500 $465,750 EBITDA Depreciation and amortization expense Current assets Net fixed assets Interest expense Total assets Liabilities and Equity: Accounts payable Accruals Notes payable $890,625 578,906 $712,500 463,125 997,500 2,173,12!5 914,375 3,087,500 332,500 1,330,000 1,662,500 $4,750,000 332,500 Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization $279,450 186,300 2,716,406 1,142,969 3,859,375 415,625 1,662,500 Total current liabilities Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity Total debt and equity $5,937,500 Shares outstanding Weighted average cost of capital 415,625 Shares outstanding Weighted average cost of capital 332,500 30% 415,625 To facilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to two decimal places Company Growth and Performance Metrics Using the change in Atherton's EVA as the decision Percentage criterion, which type of investment recommendation Change should you make to your clients O A hold recommendation O A sell recommendation O A buy recommendation Metric Year 2 Year 1 General Metrics 15.00% 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 $5,750,000 $5,000,000 $360,000 $535,000 $465,750 Which of the following statements are correct? Check all that apply $2,152,344 $1.08 Atherton's NCF is calculated by adding its annual interest expense to the corresponding year's net income $0.67 $5.00 0.00% 0.00% For any given year, one way to compute $21.23 $19.75 Atherton's EVA is as the difference between its NOPAT (such as $435,000) and the product of its operating capital ($3,574,375) and its weighted average cost of capital ($7.30) Other things remaining constant, Atherton's EVA will increase when its ROIC exceeds its WACC. MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) 34.37% $2,078,125 $1,662,500 $4,904,375 EVA Calculation An increase in the number of common shares 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) $569,250 outstanding must increase the market value of the firm's equity 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 its costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm 25.00% 7.98% 7.30% 36.64% 4.68% $212,675