11. 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 Extensive Enterprise Inc. to determine how Extensive'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 Extensive'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. Extensive Enterprise Inc. Income Statement January 1 December 31, Year 2 Year 2 Year 1 Sales $3,900,000 $3,250,000 Expenses 3,120,000 2,665,000 EBITDA $780,000 $585,000 Depreciation and amortization expense 136,500 113,750 EBIT $643,500 $471,250 Interest expense 117,000 81,250 $526,500 $390,000 Tax expense (40%) 210,600 156,000 Net income $315,900 $234.000 Common dividends $189,540 $140,400 Addition to retained earnings $126,360 $93,600 1 Excludes depreciation and amortization Extensive Enterprise Inc. Balance Sheet December 31, Year 2 Assets: Year 2 Year 1 Cash and cash equivalents $203,775 $185,250 Receivables 679,250 617,500 Inventory 1,188,688 1,080,625 Current assets $2,071,713 $1,883,375 Net fixed assets 1,324,537 1,204,125 Total current assets $3,396,250 $3,087,500 Liabilities and Equity: Accounts payable $509,438 $463,125 Accruals 331,134 301,031 Notes payable 713,213 648,375 Total current liabilities $1,553,785 $1,412,531 Long-term debt 653,778 594,344 Total liabilities $2,207,563 $2,006,875 Common stock ($1 par) 237,737 216,125 Retained earnings 950,950 864,500 Total equity $1,188,687 $1,080,625 Total liabilities and equity $3,396,250 $3,087,500 Shares outstanding 237,737 216,125 Weighted average cost of capital 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 $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 2 Year 1 Percentage Change General Metrics Sales $3,900,000 $3,250,000 20.00 % Net income 35.00 % $315,900 452,400 $234,000 $347,750 Net cash flow (NCF) $ 30.09% Net operating working capital (NOWC) $1,231,141 $ 1,119,219 10.00 % Earnings per share (EPS) $ 1.33 $1.08 23.15 % Dividends per share (DPS) $0.80 $ 0.65 23.08 % Book value per share (BVPS) $ $5.00 0.00% 5.00 1.90 Cash flow per share (CFPS) $ 1.61 18.01% Market price per share $21.73 $19.75 10.03% Metric Year 2 Year 1 Percentage Change MVA Calculation Market value of equity $ $ 21.03% Book value of equity $1,188,687 % $1,080,625 $3,187,844 Market Value Added (MVA) $ % Year 2 Year 1 Percentage Change Metric EVA Calculation $386,100 $ % $ 10.00% 7.98% 7.30% 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) $ 20.25% % % 24.16% $182,220 $ % Using the change in Extensive's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O A hold recommendation O A buy recommendation O A sell recommendation Which of the following statements are correct? Check all that apply. An increase in the number of common shares outstanding must increase the market value of the firm's equity. 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. The percentage change in Extensive's EVA indicates that management has increased its value. The percentage change in Extensive's MVA indicates that its management has increased the firm's value. Extensive's NCF is calculated by adding its annual interest expense to the corresponding year's net income. 11. 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 Extensive Enterprise Inc. to determine how Extensive'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 Extensive'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. Extensive Enterprise Inc. Income Statement January 1 December 31, Year 2 Year 2 Year 1 Sales $3,900,000 $3,250,000 Expenses 3,120,000 2,665,000 EBITDA $780,000 $585,000 Depreciation and amortization expense 136,500 113,750 EBIT $643,500 $471,250 Interest expense 117,000 81,250 $526,500 $390,000 Tax expense (40%) 210,600 156,000 Net income $315,900 $234.000 Common dividends $189,540 $140,400 Addition to retained earnings $126,360 $93,600 1 Excludes depreciation and amortization Extensive Enterprise Inc. Balance Sheet December 31, Year 2 Assets: Year 2 Year 1 Cash and cash equivalents $203,775 $185,250 Receivables 679,250 617,500 Inventory 1,188,688 1,080,625 Current assets $2,071,713 $1,883,375 Net fixed assets 1,324,537 1,204,125 Total current assets $3,396,250 $3,087,500 Liabilities and Equity: Accounts payable $509,438 $463,125 Accruals 331,134 301,031 Notes payable 713,213 648,375 Total current liabilities $1,553,785 $1,412,531 Long-term debt 653,778 594,344 Total liabilities $2,207,563 $2,006,875 Common stock ($1 par) 237,737 216,125 Retained earnings 950,950 864,500 Total equity $1,188,687 $1,080,625 Total liabilities and equity $3,396,250 $3,087,500 Shares outstanding 237,737 216,125 Weighted average cost of capital 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 $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 2 Year 1 Percentage Change General Metrics Sales $3,900,000 $3,250,000 20.00 % Net income 35.00 % $315,900 452,400 $234,000 $347,750 Net cash flow (NCF) $ 30.09% Net operating working capital (NOWC) $1,231,141 $ 1,119,219 10.00 % Earnings per share (EPS) $ 1.33 $1.08 23.15 % Dividends per share (DPS) $0.80 $ 0.65 23.08 % Book value per share (BVPS) $ $5.00 0.00% 5.00 1.90 Cash flow per share (CFPS) $ 1.61 18.01% Market price per share $21.73 $19.75 10.03% Metric Year 2 Year 1 Percentage Change MVA Calculation Market value of equity $ $ 21.03% Book value of equity $1,188,687 % $1,080,625 $3,187,844 Market Value Added (MVA) $ % Year 2 Year 1 Percentage Change Metric EVA Calculation $386,100 $ % $ 10.00% 7.98% 7.30% 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) $ 20.25% % % 24.16% $182,220 $ % Using the change in Extensive's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O A hold recommendation O A buy recommendation O A sell recommendation Which of the following statements are correct? Check all that apply. An increase in the number of common shares outstanding must increase the market value of the firm's equity. 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. The percentage change in Extensive's EVA indicates that management has increased its value. The percentage change in Extensive's MVA indicates that its management has increased the firm's value. Extensive's NCF is calculated by adding its annual interest expense to the corresponding year's net income