Atherton Corp. Income Statement January 1 - December 31, Year 2 Year 2 Sales $3,025,000 Expenses 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 Year 1 $2,750,000 2,255,000 495,000 96,250 398,750 68,750 330,000 132,000 $198.000 Year 1 $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 $188,100 Receivables 627,000 Inventory 1,097,250 Current assets 1,912,350 Net fixed assets 1,222,650 Total assets $3,135,000 Liabilities and Equity: Accounts payable $470,250 Accruals 305,663 Notes payable 658,350 Total current liabilities 1,434,263 Long-term debt 603,488 Total liabilities 2,037,750 Common stock (51 par) 219,450 Retained earnings 877,800 Total equity 1,097,250 Total debt and equity $3,135,000 Common dividends Addition to retained earnings Excludes depreciation and amortization $147,015 $98,010 $118,800 $79,200 $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 219,450 7.98% 182,875 7.30% Company Growth and Performance Metrics Metric Year 1 Using the change in Atherton's EVA as the decision Percentage criterion, which type of investment recommendation Change should you make to your clients? A sell recommendation A buy recommendation A hold recommendation Year 2 General Metrics $3,025,000 $245,025 $1,643,538 $1,136,437 O 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 $2,750,000 $198,000 $294,250 $2,257,750 $1.08 $0.67 $5.00 0.00% -0.62% $19.75 $22.22 MVA Calculation 35.01% Market value of equity Book value of equity Market Value Added (MVA) $1,097,250 $914,375 $2,697,406 Which of the following statements are correct? Check all that apply 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). Atherton'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. Atherton's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA An increase in the number of common shares outstanding must increase the market value of the firm's equity Other things remaining constant, Atherton's EVA EVA Calculation $299,475 20.00% 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) 31.18% 4.27% $111,113
