Attempts: 0.5 Keep the Highest: 0.5/3 11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Tristan, your newly appointed boss, has tasked you with evaluating the following financial data for Water and Power Co. to determine how Water & Power'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 Water & Power'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. Water and Power Co. Income Statement January 1 - December 31, Year 2 Sales Expenses EBITDA Depreciation and amortization expense EBIT Year 2 $4,200,000 3,360,000 $840,000 147,000 $693,000 126,000 $567,000 226,800 $340,200 $204,120 $136,080 Year 1 $4,000,000 3,280,000 $720,000 140,000 $560,000 100,000 $480,000 192,000 $268,000 $172,800 $115,200 Interest expense EBT Tax expense (40%) Net Income Common dividends Addition to retained earnings Excludes depreciation and amortization Long-term debt $ 1.170,400 Water and Power Co. Balance Sheet December 31, Year 2 Assets: Year 2 Cash and cash equivalents $250,500 Receivables 836,000 Inventory 1,463,000 Current assets $2,549,800 Net fixed assets INC 1,630,200 Total current assets $4,180,000 Liabilities and Equity Accounts payable mecanic $627,000 Accruals 407,550 meer as Notes payable 877,800 Total current liabilities $1,912,350 804,650 Total liabilities med names Common stock (Si par) 292,600 common stock Retained earnings Total equity $1,463,000 Total liabilities and equity $4,180,000 Shares outstanding 292,600 Weighted average cost of capital 7.98% Year 1 $225,000 760,000 1,330,000 $2,316,000 1,482,000 $3,800,000 $570,000 370,500 798,000 $1,738,500 731,500 eve $2,470,000 400.00 266,000 1,064,000 $1,330,000 $3,800,000 266,000 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. (Note: Round all percentage change answers to two decimal places. If a dollar value is below $100, round your answer to two decimal places. If your answer is negative use a minus (-) sign.) Year 2 Year 1 Percentage Change Company Growth and Performance Metrics Metric General Metrics Sales % $4,200,000 $340,200 Net income $4,000,000 $288,000 $428,000 % $ % $1,515,250 $ 90 S $1.08 % 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 $0.70 $ % $5.00 0.00% 3.73% $21.23 $19.75 % Year 2 Year 1 Percentage Change Metric MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) $ 18.24% $1,463,000 $1,330,000 $3,923,500 S Year 2 Year 1 Percentage Change $415,800 S $ 10.00% Metric EVA Calculation 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) 7.98% 7.30% S S 20.25% % 90 8.63% $164,822 $ % Using the change in Water & Power's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O A buy recommendation O A sell recommendation O A hold recommendation Which of the following statements are correct? Check all that apply. water & Power'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. Water & Power's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA other things remaining constant, Water & Power's EVA will increase when its ROIC exceeds its WACC. Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments. For any given year, one way to compute Water & Power's EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital. Grade It Now Save & Continue Continue without saving Attempts: 0.5 Keep the Highest: 0.5/3 11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Tristan, your newly appointed boss, has tasked you with evaluating the following financial data for Water and Power Co. to determine how Water & Power'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 Water & Power'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. Water and Power Co. Income Statement January 1 - December 31, Year 2 Sales Expenses EBITDA Depreciation and amortization expense EBIT Year 2 $4,200,000 3,360,000 $840,000 147,000 $693,000 126,000 $567,000 226,800 $340,200 $204,120 $136,080 Year 1 $4,000,000 3,280,000 $720,000 140,000 $560,000 100,000 $480,000 192,000 $268,000 $172,800 $115,200 Interest expense EBT Tax expense (40%) Net Income Common dividends Addition to retained earnings Excludes depreciation and amortization Long-term debt $ 1.170,400 Water and Power Co. Balance Sheet December 31, Year 2 Assets: Year 2 Cash and cash equivalents $250,500 Receivables 836,000 Inventory 1,463,000 Current assets $2,549,800 Net fixed assets INC 1,630,200 Total current assets $4,180,000 Liabilities and Equity Accounts payable mecanic $627,000 Accruals 407,550 meer as Notes payable 877,800 Total current liabilities $1,912,350 804,650 Total liabilities med names Common stock (Si par) 292,600 common stock Retained earnings Total equity $1,463,000 Total liabilities and equity $4,180,000 Shares outstanding 292,600 Weighted average cost of capital 7.98% Year 1 $225,000 760,000 1,330,000 $2,316,000 1,482,000 $3,800,000 $570,000 370,500 798,000 $1,738,500 731,500 eve $2,470,000 400.00 266,000 1,064,000 $1,330,000 $3,800,000 266,000 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. (Note: Round all percentage change answers to two decimal places. If a dollar value is below $100, round your answer to two decimal places. If your answer is negative use a minus (-) sign.) Year 2 Year 1 Percentage Change Company Growth and Performance Metrics Metric General Metrics Sales % $4,200,000 $340,200 Net income $4,000,000 $288,000 $428,000 % $ % $1,515,250 $ 90 S $1.08 % 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 $0.70 $ % $5.00 0.00% 3.73% $21.23 $19.75 % Year 2 Year 1 Percentage Change Metric MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) $ 18.24% $1,463,000 $1,330,000 $3,923,500 S Year 2 Year 1 Percentage Change $415,800 S $ 10.00% Metric EVA Calculation 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) 7.98% 7.30% S S 20.25% % 90 8.63% $164,822 $ % Using the change in Water & Power's EVA as the decision criterion, which type of investment recommendation should you make to your clients? O A buy recommendation O A sell recommendation O A hold recommendation Which of the following statements are correct? Check all that apply. water & Power'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. Water & Power's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA other things remaining constant, Water & Power's EVA will increase when its ROIC exceeds its WACC. Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments. For any given year, one way to compute Water & Power's EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital. Grade It Now Save & Continue Continue without saving