11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Rafael, 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 Year 1 tory Sales Expenses EBITDA Depreciation and amortization expense EBIT Interest expense EBT Tax expense (40%) Net Income Year 2 $3,150,000 2,520,000 $630,000 110,250 $519,750 94,500 $425,250 170,100 $255,150 $153,090 $3,000,000 2,460,000 $540,000 105,000 $435,000 75,000 $360,000 144,000 $216,000 $129,600 Common dividends Atherton Corp. Income Statement January 1 - December 31, Year 2 Year 2 Year 1 Sales Expenses $3,000,000 2,460,000 $540,000 EBITDA Depreciation and amortization expense 105,000 EBIT Interest expense $3,150,000 2,520,000 $630,000 110,250 $519,750 94,500 $425,250 170,100 $255,150 $153,090 $102,060 EBT Tax expense (40%) $435,000 75,000 $360,000 144,000 $216,000 $129,600 $86,400 Net income Common dividends Addition to retained earnings Excludes depreciation and amortization Atherton Corp. Balance Sheet December 31, Year 2 Year 2 Assets: Cash and cash equivalents Receivables Inventory $239,400 798,000 1,396,500 $2,433,900 1,556,100 $3,990,000 Year 1 $171,000 570,000 997,500 $1,738,500 1,111,500 $2,850,000 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 Sling Total equity Total liabilities and equity $598,500 389,025 837,900 $1,825,425 768,075 $2,593,500 279,300 1,117,200 $1,396,500 $3,990,000 279,300 7.98% $427,500 277,875 598,500 $1,303,875 548,625 $1,852,500 199,500 798,000 $997,500 $2,850,000 199,500 7.30% Shares outstanding Weighted average cost of capital 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 Year 1 Percentage Change Sales General Metrics $3,150,000 $255,150 $3,000,000 $216,000 $321,000 $1,446,375 $1.08 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 $0.55 $5.00 0.00% -18.63% $21.23 $19.75 MVA Calculation Market value of equity 50.49% Book value of equity $1,396,500 $997,500 $2,942,625 $311,850 40.00% 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) 7.98% 7.30% 53.04% - 14.63% $72,360 Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A hold recommendation A buy recommendation 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. 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, For any given year, one way to compute Atherton'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, Atherton's EVA will increase when its ROIC exceeds its WACC. Atherton's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA