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 Allied Biscuit Co. to determine how Allied Biscuit'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 Allied Biscuit'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. Allied Biscuit Co. Income Statement January 1 - December 31, Year 2 Year 2 Sales $3,937,500 Expenses1 3,150,000 EBITDA 787,500 Depreciation and amortization expense 137,813 649,687 Interest expense 118,125 EBT 531,562 Tax expense (40%) 212,625 Net income $318,937 Year 1 $3,750,000 3,075,000 675,000 131,250 543,750 93,750 450,000 180,000 $270,000 Year 1 $213,750 712,500 1,246,875 2,173,125 1,389,375 $3,562,500 EBIT Allied Biscuit Co. Balance Sheet December 31, Year 2 Assets: Year 2 Cash and cash equivalents $288,563 Receivables 961,875 Inventory 1,683,281 Current assets 2,933,719 Net fixed assets 1,875,656 Total assets $4,809,375 Liabilities and Equity: Accounts payable $721,406 Accruals 468,914 Notes payable 1,009,969 Total current liabilities 2,200,289 Long-term debt 925,805 Total liabilities 3,126,094 Common stock ($1 par) 336,656 Retained earnings 1,346,625 Total equity 1,683,281 Total debt and equity $4,809,375 Common dividends Addition to retained earnings 1Excludes depreciation and amortization $191,362 $127,575 $162,000 $ 108,000 $534,375 347,344 748,125 1,629,844 685,781 2,315,625 249,375 997,500 1,246,875 $3,562,500 Shares outstanding Weighted average cost of capital 336,656 7.98% 249,375 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 Year 2 General Metrics $3,937,500 $318,937 Using the change in Allied Biscuit's EVA as the decision Percentage criterion, which type of investment recommendation Change should you make to your clients? O A hold recommendation O A buy recommendation O A sell recommendation $3,750,000 $270,000 $401,250 $1,743,399 Sales 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 $0.57 $5.00 0.00% -15.53% $19.75 $21.23 MVA Calculation 45.12% Market value of equity Book value of equity Market Value Added (MVA) $1,683,281 $1,246,875 $3,678,281 Which of the following statements are correct? Check all that apply. The percentage change in Allied Biscuit's EVA indicates that management has decreased its value. Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments. Allied Biscuit'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 Allied Biscuit's EVA is as the difference between its NOPAT (such as $326,250) and the product of its operating capital ($2,680,781) and its weighted average cost of capital ($7.30). Allied Biscuit's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA. EVA Calculation $389,812 35.00% 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) 47.58% -11.50% $100,972