11. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA)

Josh, your newly appointed boss, has tasked you with evaluating the following financial data for Atherton Corp. to determine how Athertons 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 Athertons 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 firms 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	$9,350,000	$8,500,000
Expenses1

	7,480,000	6,970,000
EBITDA	$1,870,000	$1,530,000
Depreciation and amortization expense	327,250	297,500
EBIT	$1,542,750	$1,232,500
Interest expense	280,500	212,500
EBT	$1,262,250	$1,020,000
Tax expense (40%)	504,900	408,000
Net income	$757,350	$612,000
Common dividends	$454,410	$367,200
Addition to retained earnings	$302,940	$244,800
1

Excludes depreciation and amortization

Atherton Corp. Balance Sheet December 31, Year 2
Assets:	Year 2	Year 1
Cash and cash equivalents	$557,175	$484,500
Receivables	1,857,250	1,615,000
Inventory	3,250,188	2,826,250
Current assets	$5,664,613	$4,925,750
Net fixed assets	3,621,637	3,149,250
Total current assets	$9,286,250	$8,075,000
Liabilities and Equity:
Accounts payable	$1,392,938	$1,211,250
Accruals	905,409	787,313
Notes payable	1,950,113	1,695,750
Total current liabilities	$4,248,460	$3,694,313
Long-term debt	1,787,603	1,554,438
Total liabilities	$6,036,063	$5,248,750
Common stock ($1 par)	650,037	565,250
Retained earnings	2,600,150	2,261,000
Total equity	$3,250,187	$2,826,250
Total liabilities and equity	$9,286,250	$8,075,000
Shares outstanding	650,037	565,250
Weighted average cost of capital	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.)

Company Growth and Performance Metrics
Metric	Year 2	Year 1	Percentage Change
General Metrics
Sales	$9,350,000	$8,500,000	%
Net income	$757,350	$612,000	%
Net cash flow (NCF)	$	$909,500	%
Net operating working capital (NOWC)	$3,366,266	$	%
Earnings per share (EPS)	$	$1.08	%
Dividends per share (DPS)	$0.70	$	%
Book value per share (BVPS)	$	$5.00	0.00%
Cash flow per share (CFPS)	$	$	3.73%
Market price per share	$20.74	$19.75	%

Metric	Year 2	Year 1	Percentage Change
MVA Calculation
Market value of equity	$	$	20.76%
Book value of equity	$3,250,187	$2,826,250	%
Market Value Added (MVA)	$	$8,337,438	%

Metric	Year 2	Year 1	Percentage Change
EVA Calculation
Net operating profit after-tax (NOPAT)	$925,650	$	%
Investor-supplied operating capital	$	$	15.00%
Weighted average cost of capital	7.98%	7.30%
Dollar cost of capital	$	$	25.71%
Return on invested capital (ROIC)	%	%	8.87%
Economic Value Added (EVA)	$368,262	$	%

Using the change in Athertons EVA as the decision criterion, which type of investment recommendation should you make to your clients?

A hold recommendation

A sell recommendation

A buy recommendation

Which of the following statements are correct? Check all that apply.

Athertons NCF is calculated by adding its annual depreciation and amortization expense to the corresponding years EBITDA.

For any given year, one way to compute Athertons EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital.

Athertons 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.

Other things remaining constant, Athertons EVA will increase when its ROIC exceeds its WACC.

Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments.