11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Ryker, 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 Sales Expenses EBITDA Depreciation and amortization expense EBIT Year 2 $3,675,000 2,940,000 $735,000 128,625 $606,375 110,250 $496,125 198,450 $297,675 $178,605 $119,070 Year 1 $3,500,000 2,870,000 $630,000 122,500 $507,500 87,500 Interest expense EBT $420,000 Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization 168,000 $252,000 $151,200 $100,800 Extensive Enterprise Inc. Balance Sheet December 31, Year 2 Assets: Cash and cash equivalents Receivables Inventory Year 2 $249,375 831,250 1,454,688 $2,535,313 1,620,937 $4,156,250 Year 1 $199,500 665,000 1,163,750 $2,028,250 1,296,750 $3,325,000 Current assets Net fixed assets Total current assets Liabilities and Equity: Accounts payable Accruals $498,750 Notes payable Total current liabilities Long-term debt Total liabilities $623,438 405,234 872,813 $1,901,485 800,078 $2,701,563 290,937 1,163,750 $1,454,687 $4,156,250 290,937 7.98% Common stock ($1 par) Retained earnings 324,188 698,250 $1,521,188 640,063 $2,161,250 232,750 931,000 $1,163,750 $3,325,000 232,750 7.30% Total equity Total liabilities and equity 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.) 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 General Metrics Sales $3,675,000 Net income $297,675 $3,500,000 $252,000 $374,500 $1,506,641 $1.08 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) $0.61 $5.00 0.00% -8.70% Market price per share $21.73 $19.75 MVA Calculation Market value of equity 37.53% $1,454,687 Book value of equity Market Value Added (MVA) $1,163,750 $3,433,063 EVA Calculation $363,825 25.00% 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) 36.64% -4.44% $114,157 Using the change in Extensive's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A buy recommendation O A hold recommendation O A sell 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. Extensive's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA. Other things remaining constant, Extensive's EVA will increase when its ROIC exceeds its WACC. 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. Extensive'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. 11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Ryker, 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 Sales Expenses EBITDA Depreciation and amortization expense EBIT Year 2 $3,675,000 2,940,000 $735,000 128,625 $606,375 110,250 $496,125 198,450 $297,675 $178,605 $119,070 Year 1 $3,500,000 2,870,000 $630,000 122,500 $507,500 87,500 Interest expense EBT $420,000 Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization 168,000 $252,000 $151,200 $100,800 Extensive Enterprise Inc. Balance Sheet December 31, Year 2 Assets: Cash and cash equivalents Receivables Inventory Year 2 $249,375 831,250 1,454,688 $2,535,313 1,620,937 $4,156,250 Year 1 $199,500 665,000 1,163,750 $2,028,250 1,296,750 $3,325,000 Current assets Net fixed assets Total current assets Liabilities and Equity: Accounts payable Accruals $498,750 Notes payable Total current liabilities Long-term debt Total liabilities $623,438 405,234 872,813 $1,901,485 800,078 $2,701,563 290,937 1,163,750 $1,454,687 $4,156,250 290,937 7.98% Common stock ($1 par) Retained earnings 324,188 698,250 $1,521,188 640,063 $2,161,250 232,750 931,000 $1,163,750 $3,325,000 232,750 7.30% Total equity Total liabilities and equity 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.) 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 General Metrics Sales $3,675,000 Net income $297,675 $3,500,000 $252,000 $374,500 $1,506,641 $1.08 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) $0.61 $5.00 0.00% -8.70% Market price per share $21.73 $19.75 MVA Calculation Market value of equity 37.53% $1,454,687 Book value of equity Market Value Added (MVA) $1,163,750 $3,433,063 EVA Calculation $363,825 25.00% 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) 36.64% -4.44% $114,157 Using the change in Extensive's EVA as the decision criterion, which type of investment recommendation should you make to your clients? A buy recommendation O A hold recommendation O A sell 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. Extensive's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA. Other things remaining constant, Extensive's EVA will increase when its ROIC exceeds its WACC. 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. Extensive'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