9. Value added to a firm

Financial statements reflect only book values of the data that analysts use to evaluate a companys performance. To determine if a firms earnings, after taxes but before the payment of interest and dividends, are sufficient to compensate both the firms bondholders and shareholders, Stern Stewart Management Services developed an analytical technique called economic value added (EVA). EVA effectively measures the amount of shareholder wealth that the firms management has added to the value of the firm during a period of time. If EVA is positive, then management has added value, while a negative value indicates that the firms managers reduced the firms value and shareholders might have earned more value by investing in some other investment with the same level of risk.

Consider this case: Last year, Jackson Tires reported net sales of $40,000,000 and total operating costs (including depreciation) of $26,000,000. Jackson Tires has $43,500,000 of investor-supplied capital, which has an after-tax cost of 12.5%. If Jackson Tiress tax rate is 40%, how much value did its management create or lose for the firm during the year (rounded to the nearest whole dollar)?

$814,688

$2,962,500

$18,562,500

$20,662,500

You have taken a job as an entry-level analyst, and your boss has asked you to find the expected value of Monroe Manufacturings stock. As you were doing your research, you found out that Monroe Manufacturing just paid a dividend (D0D0) of $3.75. The firm has experienced consistent growth of 7% for the last couple of years, and you believe that the firm will continue to grow at the same rate in the future.

If investors require a return of 10% on Monroe Manufacturings stock, what is the expected value of the companys stock?

$133.75

$147.13

$120.38

$107.00

What would be the change in the expected value of Monroe Manufacturings stock if investors required a return of 12% on the companys stock?