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

Aa Aa E 12. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) Ryker, 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. Year 1 Atherton Corp. Income Statement January 1 - December 31, Year 2 Year 2 Sales $3,025,000 Expensesi 2,420,000 EBITDA 605,000 Depreciation and amortization expense 105,875 EBIT 499,125 Interest expense 90,750 EBT 408,375 Tax expense (40%) 163,350 Net Income $245,025 Common dividends $147,015 Addition to retained earnings $98,010 Excludes depreciation and amortization Year 1 $2,750,000 2,255,000 495,000 9 6,250 398,750 6 8,750 330,000 132,000 $198,000 $118,800 $79,200 $156,750 522,500 914,375 1,593,625 1,018,875 $2,612,500 Atherton Corp. Balance Sheet December 31, Year 2 Assets: Year 2 Cash and cash equivalents $180,263 Receivables 600,875 Inventory 1,051,531 Current assets 1,832,669 Net fixed assets 1,171,706 Total assets $3,004,375 Liabilities and Equity: Accounts payable $450,656 292,927 Notes payable 630,919 Total current liabilities 11 374,502 Long-term debt 578,342 Total liabilities 1,952,844 Common stock ($1 par) 210,306 Retained earnings 841,225 Total equity 1,051,531 Total debt and equity $3,004,375 Accruals $391,875 254,719 548,625 1,195,219 502,906 1,698,125 182,875 731,500 914,375 $2,612,500 Shares outstanding Weighted average cost of capital 210,306 7.9896 182,875 7.30% Metric Year 1 Change Year 2 General Metrics $3,025,000 $245,025 $2,750,000 $198,000 $294,250 $1,089,086 Sales Net income in the 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 $0.70 $5.00 0.00% 3.73% $19.75 $20.74 MVA Calculation 20.76% Market value of equity Book value of equity Market Value Added (MVA) $1,051,531 $914,375 $2,697,406 EVA Calculation $299,475 15.00% 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) 25.71% 8.87% $119,144 Using the change in Atherton's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O O O A buy recommendation A hold 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 NCF is calculated by adding its annual interest expense to the corresponding year's net income. Other things remaining constant, Atherton's EVA will increase when its ROIC exceeds its WACC. For any given year, one way to compute Atherton's EVA is as the difference between its NOPAT (such as $239,250) and the product of its operating capital ($1,965,906) and its weighted average cost of capital ($7.30). The percentage change in Atherton's MVA indicates that its management has increased the firm's value