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 2 Year 1 Sales Expenses! EBITDA Depreciation and amortization expense 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 $3,000,000 2,460,000 $540,000 105,000 $435,000 75,000 $360,000 144,000 $216,000 $129,600 $86,400 EBT Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization Atherton Corp. Balance Sheet December 31, Year 2 Assets: Year 1 Cash and cash equivalents Year 2 $239,400 798,000 1,396,500 Receivables $171,000 570,000 997,500 Inventory Current assets Net fixed assets $2,433,900 1,556,100 $3,990,000 $1,738,500 1,111,500 $2,850,000 Total current assets Liabilities and Equity: Accounts payable Accruals $598,500 389,025 837,900 $427,500 277,875 598,500 Notes payable Total current liabilities $1,303,875 $1,825,425 768,075 Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity $2,593,500 279,300 1,117,200 $1,396,500 $3,990,000 279,300 7.98% 548,625 $1,852,500 199,500 798,000 $997,500 $2,850,000 199,500 7.30% 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.) Company Growth and Performance Metrics Metric Year 2 Year 1 Percentage Change General Metrics $3,150,000 Sales Net income $255,150 $3,000,000 $216,000 $321,000 $1,446,375 Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) $1.08 $0.55 $ $5.00 0.00% Cash flow per share (CFPS) -18.63% Market price per share $21.23 $19.75 50.49% MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) $1,396,500 $997,500 $2,942,625 $311,850 $ 40.00% 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) 7.98% 7.30% 53.04% % % -14.63% Economic Value Added (EVA) $72,360 Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O A buy recommendation O A sell recommendation O A hold 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. O 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. O Atherton's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA. Other things remaining constant, Atherton's EVA will increase when its ROIC exceeds its WACC. 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 2 Year 1 Sales Expenses! EBITDA Depreciation and amortization expense 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 $3,000,000 2,460,000 $540,000 105,000 $435,000 75,000 $360,000 144,000 $216,000 $129,600 $86,400 EBT Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization Atherton Corp. Balance Sheet December 31, Year 2 Assets: Year 1 Cash and cash equivalents Year 2 $239,400 798,000 1,396,500 Receivables $171,000 570,000 997,500 Inventory Current assets Net fixed assets $2,433,900 1,556,100 $3,990,000 $1,738,500 1,111,500 $2,850,000 Total current assets Liabilities and Equity: Accounts payable Accruals $598,500 389,025 837,900 $427,500 277,875 598,500 Notes payable Total current liabilities $1,303,875 $1,825,425 768,075 Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity $2,593,500 279,300 1,117,200 $1,396,500 $3,990,000 279,300 7.98% 548,625 $1,852,500 199,500 798,000 $997,500 $2,850,000 199,500 7.30% 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.) Company Growth and Performance Metrics Metric Year 2 Year 1 Percentage Change General Metrics $3,150,000 Sales Net income $255,150 $3,000,000 $216,000 $321,000 $1,446,375 Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) $1.08 $0.55 $ $5.00 0.00% Cash flow per share (CFPS) -18.63% Market price per share $21.23 $19.75 50.49% MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) $1,396,500 $997,500 $2,942,625 $311,850 $ 40.00% 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) 7.98% 7.30% 53.04% % % -14.63% Economic Value Added (EVA) $72,360 Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O A buy recommendation O A sell recommendation O A hold 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. O 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. O Atherton's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA. Other things remaining constant, Atherton's EVA will increase when its ROIC exceeds its WACC