4. Financial Statements, Cash Flow, and Taxes: EVA-MVA

The financial statements reflect historical data, but managers' performance must be evaluated on the basis of -Select-bookmarketreplacementCorrect 1 of Item 1 values. To provide this information, financial analysts have developed two measures: Market Value Added (MVA) and Economic Value Added (EVA).

Market Value Added represents the difference between the money stockholders have invested in the firm versus the cash they could receive if the firm were sold. The equation for MVA is:

MVA = (Shares outstanding Stock price) Total common equity

Shareholder wealth is maximized when this difference is -Select-maximizedzerominimizedCorrect 2 of Item 1. The -Select-lowerhigherCorrect 3 of Item 1 a firm's MVA, the better the job management is doing for its shareholders.

Economic Value Added is sometimes called "-Select-economic profitaccounting profitnet incomeCorrect 4 of Item 1", and it is closely related to MVA. The equation for EVA is:

EVA = EBIT(1 - T) - (Total invested capital x After-tax percentage cost of capital)

Note that total invested capital is equal to the sum of notes payable, long-term debt, and total common equity. EVA differs from -Select-net worthnet incomecash flowCorrect 5 of Item 1 because EVA has a deduction for the cost of equity. Positive EVA on an annual basis helps ensure that MVA is also positive. -Select-MVAEPSEVACorrect 6 of Item 1 can be determined for divisions as well as for the firm as a whole, so it is useful for establishing reasonable compensation for divisional managers as well as top company officers.

Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below.

Balance Sheets:
	2019	2018
Assets
Cash and equivalents	$100	$85
Accounts receivable	275	300
Inventories	375	250
Total current assets	$750	$635
Net plant and equipment	2,300	1,490
Total assets	$3,050	$2,125
Liabilities and Equity
Accounts payable	$150	$85
Accruals	75	50
Notes payable	150	75
Total current liabilities	$375	$210
Long-term debt	450	290
Total liabilities	825	500
Common stock	1,225	1,225
Retained earnings	1,000	400
Common equity	2,225	1,625
Total liabilities and equity	$3,050	$2,125

Income Statements:
	2019	2018
Sales	$2,285	$1,585
Operating costs excluding depreciation	1,250	1,000
EBITDA	$1,035	$585
Depreciation and amortization	100	75
EBIT	$935	$510
Interest	63	46
EBT	$872	$464
Taxes (25%)	218	116
Net income	$654	$348
Dividends paid	$54	$48
Addition to retained earnings	$600	$300
Shares outstanding	110	110
Price	$22.73	$20.23
WACC	11.00%

Using the financial statements above, what is Rosnan's 2019 market value added (MVA)? Do not round intermediate calculations. Round your answer to the nearest cent.

$

Using the financial statements given earlier, what is Rosnan's 2019 economic value added (EVA)? Do not round intermediate calculations. Round your answer to the nearest cent.

$