11. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) Aa Rafael, your newly appointed boss, has tasked you with evaluating the following financial data for Galaxy Corp. to determine how Galaxy'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 Galaxy'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. Galaxy Corp Income Statement January 1 - December 31, Year 2 Galaxy Corp Balance Sheet December 31, Year 2 Year 2 $9,450,000 7,560,000 1,890,000 330,750 1,559,250 283,500 1,275,750 510,300 $765,450 Year 1 $9,000,000 7,380,000 1,620,000 315,000 1,305,000 225,000 Assets: Cash and cash equivalents Receivables Inventory Year 2 $615,600 2,052,000 3,591,000 6,258,600 4,001,400 $10,260,000 Year 1 $513,000 1,710,000 2,992,500 5,215,500 3,334,500 $8,550,000 Expenses1 EBITDA Depreciation and amortization expense Current assets EBIT Net fixed assets Interest expense Total assets Liabilities and Equity: Accounts payable $1,539,000 $1,282,500 833,625 1,795,500 3,911,625 1,645,87!5 5,557,500 598,500 2,394,000 2,992,500 $8,550,000 Tax expense (40%) 432,000 $648,000 $388,800 259,200 1,000,350 2,154,600 4,693,950 1,975,050 6,669,000 718,200 2,872,800 3,591,000 $10,260,000 Net income Notes payable Common dividends Addition to retained earnings 1Excludes depreciation and amortization $459,270 306,180 Total current liabilities Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity Total debt and equity Shares outstanding Weighted average cost of capital 718,200 598,500 7.30% 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 Galaxy's EVA as the decision Percentage criterion, which type of investment recommendation A sell recommendation A hold recommendation Metric Year 2 Year 1 Change should you make to your clients? General Metrics O A buy recommendation 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 $9,450,000 9,000,000 $648,000 $963,000 $3,719,250 $3,099,375 $1.08 $765,450 $1,096,200 Which of the following statements are correct? Check all that apply For any given year, one way to compute Galaxys $0.64 EVA is as the difference between its NOPAT (such as $783,000) and the product of its operating capital ($6,433,875) and its weighted average cost of capital ($7.30) An increase in the number of common shares outstanding must increase the market value of the firm's equity Galaxy'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. Galaxy's NCF is calculated by adding its annual interest expense to the corresponding year's net income $5.00 0.00% -4.97% $20.74 $19.75 MVA Calculation 26.02% Market value of equity Book value of equity Market Value Added (MVA) $3,591,000 $2,992,500 $8,827,875 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) $935,550 20.00% 7.98% 7.30% 31.18% -0.41% $319,635 The percentage change in Galaxy's EVA indicates that management has increased its value 11. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) Aa Rafael, your newly appointed boss, has tasked you with evaluating the following financial data for Galaxy Corp. to determine how Galaxy'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 Galaxy'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. Galaxy Corp Income Statement January 1 - December 31, Year 2 Galaxy Corp Balance Sheet December 31, Year 2 Year 2 $9,450,000 7,560,000 1,890,000 330,750 1,559,250 283,500 1,275,750 510,300 $765,450 Year 1 $9,000,000 7,380,000 1,620,000 315,000 1,305,000 225,000 Assets: Cash and cash equivalents Receivables Inventory Year 2 $615,600 2,052,000 3,591,000 6,258,600 4,001,400 $10,260,000 Year 1 $513,000 1,710,000 2,992,500 5,215,500 3,334,500 $8,550,000 Expenses1 EBITDA Depreciation and amortization expense Current assets EBIT Net fixed assets Interest expense Total assets Liabilities and Equity: Accounts payable $1,539,000 $1,282,500 833,625 1,795,500 3,911,625 1,645,87!5 5,557,500 598,500 2,394,000 2,992,500 $8,550,000 Tax expense (40%) 432,000 $648,000 $388,800 259,200 1,000,350 2,154,600 4,693,950 1,975,050 6,669,000 718,200 2,872,800 3,591,000 $10,260,000 Net income Notes payable Common dividends Addition to retained earnings 1Excludes depreciation and amortization $459,270 306,180 Total current liabilities Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity Total debt and equity Shares outstanding Weighted average cost of capital 718,200 598,500 7.30% 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 Galaxy's EVA as the decision Percentage criterion, which type of investment recommendation A sell recommendation A hold recommendation Metric Year 2 Year 1 Change should you make to your clients? General Metrics O A buy recommendation 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 $9,450,000 9,000,000 $648,000 $963,000 $3,719,250 $3,099,375 $1.08 $765,450 $1,096,200 Which of the following statements are correct? Check all that apply For any given year, one way to compute Galaxys $0.64 EVA is as the difference between its NOPAT (such as $783,000) and the product of its operating capital ($6,433,875) and its weighted average cost of capital ($7.30) An increase in the number of common shares outstanding must increase the market value of the firm's equity Galaxy'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. Galaxy's NCF is calculated by adding its annual interest expense to the corresponding year's net income $5.00 0.00% -4.97% $20.74 $19.75 MVA Calculation 26.02% Market value of equity Book value of equity Market Value Added (MVA) $3,591,000 $2,992,500 $8,827,875 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) $935,550 20.00% 7.98% 7.30% 31.18% -0.41% $319,635 The percentage change in Galaxy's EVA indicates that management has increased its value