12. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) Rafael, your newly appointed boss, has tasked you with evaluating the following financial data for Water and Power Co. to determine how Water & Power 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 Water Power'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 ha provided you with the following income statement and balance sheet. Water and Power Co. Income Statement January 1 - December 31, Year 2 Year 2 Sales Expenses EBITDA Depreciation and amortization expense EBIT Interest expense EBT Tax expense (40%) Net income $1,925,000 1,540,000 385,000 67,375 317,625 57,750 259,875 103,950 $155,925 Year 1 $1,750,000 1.435,000 315,000 61,250 253,750 43,750 210,000 84,000 $126,000 Year 1 $99,750 332,500 581,875 1,014,125 648,375 $1,662,500 Water and Power Co. Balance Sheet December 31, Year 2 Assets: Year 2 Cash and cash equivalents $129,675 Receivables 432,250 Inventory 756,438 Current assets 1,318,363 Net fixed assets 842,887 Total assets $2,161,250 Liabilities and Equity: Accounts payable $324,188 Accruals 210,722 Notes payable 453,863 Total current liabilities 988,773 Long-term debt 416,041 Total liabilities 1,404,813 Common stock ($1 par) 151,287 Retained earnings 605,150 Total equity 756,437 Total debt and equity $2,161,250 Common dividends Addition to retained earnings 1Excludes depreciation and amortization $93,555 $62,370 $75,600 $50,400 $249,375 162,094 349,125 760,594 320,031 1,080,625 116,375 465,500 581,875 $1,662,500 Shares outstanding Weighted average cost of capital 151,287 7.98% 116,375 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to two decimal places. Company Growth and Performance Metrics Metric Year 1 Percentage Change Year 2 General Metrics $1,925,000 $155,925 Using the change in Water & Power's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O A buy recommendation O A hold recommendation O A sell recommendation Sales $1,750,000 $126,000 $187,250 $783,453 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 $1.08 $0.62 $5.00 $19.75 $21.23 MVA Calculation Market value of equity Book value of equity Which of the following statements are correct? Check all that apply. Water & Power's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA For any given year, one way to compute Water & Power's EVA is as the difference between its NOPAT (such as $152,250) and the product of its operating capital ($1,251,031) and its weighted average cost of capital ($7.30). The percentage change in Water & Power's EVA indicates that management has decreased its value. An increase in the number of common shares outstanding must increase the market value of the firm's equity The percentage change in Water & Power's MVA indicates that its management has increased the firm's value. $756,437 Market Value Added (MVA) $581,875 $1,716,531 EVA Calculation $190,575 30.0096 7.98% 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) 42.11% 70%