11. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) Tristan, 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. he Galaxy Corp. Income Statement January 1 - December 31, Year 2 Year 2 Year 1 Sales Expenses EBITDA Depreciation and amortization expense EBIT Interest expense EBT Tax expense (40%) Net income Common dividends Addition to retained earnings 1Excludes depreciation and amortization $9,350,000 $8,500,000 7,480,000 6,970,000 $1,870,000 $1,530,000 327,250 297,500 $1,542,750 $1,232,500 280,500 212,500 $1,262,250 $1,020,000 504,900 408,000 $757,350 $612,000 $454,410 $367,200 $302,940 $244,800 Galaxy Corp. Balance Sheet December 31, Year 2 Year 2 Year 1 $557,175 1,857,250 $484,500 1,615,000 2,826,250 3,250,188 $5,664,613 3,621,637 $4,925,750 3,149,250 $8,075,000 $9,286,250 $1,392,938 905,409 Assets: 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) Retained earnings Total equity Total liabilities and equity Shares outstanding Weighted average cost of capital 1,950,113 $4,248,460 1,787,603 $1,211,250 787,313 1,695,750 $3,694,313 1,554,438 $5,248,750 565,250 2,261,000 $2,826,250 $8,075,000 $6,036,063 650,037 2,600,150 $3,250,187 $9,286,250 650,037 565,250 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.) Year 2 Year 1 Percentage Change $8,500,000 % $9,350,000 $757,350 $612,000 % $ $909,500 % Company Growth and Performance Metrics Metric General Metrics 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 $3,366,266 $ % $ $1.08 % $0.70 $ % $ $5.00 0.00% $ $ 3.73% $20.74 $19.75 % Year 2 Year 1 Percentage Change Metric MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) $ 20.76% $3,250,187 $2,826,250 % $8,337,438 % Year 2 Year 1 Percentage Change $925,650 $ % $ $ 15.00% 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% $ $ 25.71% % % 8.87% $368,262 $ % Using the change in Galaxy's EVA as the decision criterion, which type of investment recommendation should you make to your clients? Using the change in Galaxy's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A sell recommendation O A hold recommendation O A buy recommendation Which of the following statements are correct? Check all that apply. 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. Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments. Galaxy's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA. For any given year, one way to compute Galaxy's EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital. Other things remaining constant, Galaxy's EVA will increase when its ROIC exceeds its WACC