11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Asher, your newly appointed boss, has tasked you with evaluating the following financial data for Western Gas & Electric Co. to determine how Western GSE'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 in Western Gae'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 Western Gas & Electric Co. Income Statement 7. ted January 1 - December 31, Year 2 Year! Year 2 $4,675,000 3,740,000 $935,000 Sales Expenses EBITDA Depreciation and amortization expense EBIT Interest expense 163,625 $771,375 140,250 $631,125 252,450 $4,250,000 3,405,000 $765,000 148,750 5616,250 106,250 $510,000 204,000 $306,000 $183,600 $122,400 Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization $378,675 $227,205 $151,470 Ch 06: Assignment - Accounting for Financial Management Western Gas & Electric Co. Income Statement January 1 - December 31, Year 2 Year 2 Year 1 Sales Expenses EBITDA Depreciation and amortization expense EBIT Interest expense EBT $4,675,000 3,740,000 $935,000 163,625 $771,375 140,250 $631,125 252,450 $378,675 $227,205 $151,470 $4,250,000 3,485,000 $765,000 148,750 $616,250 106,250 $510,000 204,000 $306,000 $183,600 $122,400 Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization Western Gas & Electric Co. Balance Sheet Ch 06: Assignment - Accounting for Financial Management Western Gas & Electric Co. Balance Sheet December 31, Year 2 Year 2 Year 1 $302,813 $242,250 1,009,375 807,500 1,766,406 1,413,125 $3,078,594 $2,462,875 1,968,281 1,574,625 $5,046,875 $4,037,500 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 $757,031 $605,625 492,070 393,656 1,059,844 847,875 $2,308,945 $1,847,156 971,523 777,219 $3,280,469 $2,624,375 353,281 282,625 1,413,125 1,130,500 $1,766,406 $1,413,125 $5,046,875 $4,037,500 353,281 282,625 7.98% 7.30% Ch 06: Assignment - Accounting for Financial Management 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 1 Percentage Change Year 2 General Metrics $4,675,000 $378,675 Sales Net income $4,250,000 $306,000 $454,750 % % $1,829,493 $1.08 $0.64 $5.00 0.00% -4.35% $21.23 $19.75 34.379 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 Dollar cost of capital Return on invested capital (ROIC) Economic Value Added $1,766,406 $1,413,125 $4,168,719 $462,825 $ 25.00% 7.989 7.30 36.64 0.16% 55159 9:17 AM Company Growth and Performance Metrics Metric Year 2 Year 1 Percentage Change General Metrics Sales 94 $4,675,000 $378,675 Net income $4,250,000 $306,000 $454,750 $1,829,493 5 $1.08 $0.64 $ $5.00 0.00% 4.35% $21.23 $19.75 34,37% Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (OPS) 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 Dollar cost of capital Return on invested capital (ROIC) Economic Value Added (EVA) $1,766,406 $1,413,125 $4,168,719 5462,825 $ $ 25.00% 7.98% 7.30% $ 36.64% 9 96 0.16% $159,886 Using the change in Western G&E'S EVA as the decision criterion, which type of investment recommendation should you make to your clients? h 06: Assignment - Accounting for Financial Management 25.00% 7.989 7.30% Investor-supplied operating capital Weighted average cost of capital Dollar cost of capital Return on invested capital (ROIC) Economic Value Added (EVA) $ $ 36.649 % 0.16% $159,836 % Using the change in Western G&E's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A sell recommendation A buy recommendation A hold recommendation Which of the following statements are correct? Check all that apply. Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments. For any given year, one way to compute Western G&E'S EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital Western G&E's NCF is calculated by adding its annual interest expense to the corresponding year's net income. The percentage change in Western G&E's MVA indicates that its management has increased the firm's value The percentage change in Western G&E's EVA indicates that management has increased its value