Accounting for Financial Management: EVA$/$MVA

The financial statements reflect historical data, but managers' performance must be evaluated on the basis of

market

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 $\backslash$times Stock price$)$ Total common equity

Shareholder wealth is maximized when this difference is

maximized

$.$ The

higher

a firm's MVA, the better the job management is doing for its shareholders.

Economic Value Added is sometimes called $"$

economic profit

$",$ and it is closely related to MVA. The equation for EVA is:

EVA $=$ NOPAT $-($Total net operating capital$)($WACC$)$

EVA differs from invested capital is equal to the sum of notes payable, long$-$term debt, and total common equity.

EVA differs from

net income

because EVA has a deduction for the cost of equity. Positive EVA on an annual basis helps ensure that MVA is also positive.

EVA

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.

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Quantitative Problem: Rosnan Industries' $2018$ and $2017$ balance sheets and income statements are shown below. All of the balance of Cash and Equivalents is an operating asset.

Balance Sheets:

$20182017$

Cash and equivalents $$100$ $$85$

Accounts receivable $275200$

Inventories $375250$

Total current assets $$750$ $$635$

Net plant and equipment $2,0001,490$

Total assets $$2,750$ $$2,125$

Accounts payable $$150$ $$85$

Accruals $7550$

Notes payable $15075$

Total current liabilities $$375$ $$210$

Long$-$term debt $450290$

Common stock $1,2251,225$

Retained earnings $700400$

Total liabilities and equity $$2,750$ $$2,125$

Income Statements:

$20182017$

Sales $$2,000$ $$1,500$

Operating costs excluding depreciation $1,2501,000$

EBITDA $$750$ $$500$

Depreciation and amortization $10075$

EBIT $$650$ $$425$

Interest $6245$

EBT $$588$ $$380$

Taxes $(40\%)235152$

Net income $$353$ $$228$

Dividends paid $$53$ $$48$

Addition to retained earnings $$300$ $$180$

Shares outstanding $190190$

Price $$20\mathrm{.}83$ $$18\mathrm{.}33$

WACC $12\mathrm{.}00\%$

Using the financial statements above, what is Rosnan's $2018$ market value added $($MVA$)?$ Do not round intermediate calculations. Round your answer to the nearest dollar.

$

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Review the MVA definition and equation.

Be careful about the order of mathematical operations and parentheses.

Make sure that you include total common equity and not just retained earnings or common stock.

Using the financial statements given earlier, what is Rosnan's $2018$ economic value added $($EVA$)?$ Do not round intermediate calculations. Round your answer to the nearest cent.

$

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Incorrect

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Review the EVA definition and equation.

Review the definition of total invested capital.

Be careful about the order of mathematical operations and parentheses.