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11. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA)

Alexis, your newly appointed boss, has tasked you with evaluating the following financial data for Western Gas & Electric Co. to determine how Western G&Es 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 Western G&Es 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 firms value has changed, and he has provided you with the following income statement and balance sheet.

Western Gas & Electric Co. Income Statement January 1 - December 31, Year 2
	Year 2	Year 1
Sales	$8,400,000	$8,000,000
Expenses11	6,720,000	6,560,000
EBITDA	$1,680,000	$1,440,000
Depreciation and amortization expense	294,000	280,000
EBIT	$1,386,000	$1,160,000
Interest expense	252,000	200,000
EBT	$1,134,000	$960,000
Tax expense (40%)	453,600	384,000
Net income	$680,400	$576,000
Common dividends	$408,240	$345,600
Addition to retained earnings	$272,160	$230,400
11Excludes depreciation and amortization

Western Gas & Electric Co. Balance Sheet December 31, Year 2
Assets:	Year 2	Year 1
Cash and cash equivalents	$638,400	$456,000
Receivables	2,128,000	1,520,000
Inventory	3,724,000	2,660,000
Current assets	$6,490,400	$4,636,000
Net fixed assets	4,149,600	2,964,000
Total current assets	$10,640,000	$7,600,000
Liabilities and Equity:
Accounts payable	$1,596,000	$1,140,000
Accruals	1,037,400	741,000
Notes payable	2,234,400	1,596,000
Total current liabilities	$4,867,800	$3,477,000
Long-term debt	2,048,200	1,463,000
Total liabilities	$6,916,000	$4,940,000
Common stock ($1 par)	744,800	532,000
Retained earnings	2,979,200	2,128,000
Total equity	$3,724,000	$2,660,000
Total liabilities and equity	$10,640,000	$7,600,000
Shares outstanding	744,800	532,000
Weighted average cost of capital	7.98%	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.)

Company Growth and Performance Metrics
Metric	Year 2	Year 1	Percentage Change
General Metrics
Sales	$8,400,000	$8,000,000	%
Net income	$680,400	$576,000	%
Net cash flow (NCF)	$	$856,000	%
Net operating working capital (NOWC)	$3,857,000	$	%
Earnings per share (EPS)	$	$1.08	%
Dividends per share (DPS)	$0.55	$	%
Book value per share (BVPS)	$	$5.00	0.00%
Cash flow per share (CFPS)	$	$	-18.63%
Market price per share	$21.73	$19.75	%

Metric	Year 2	Year 1	Percentage Change
MVA Calculation
Market value of equity	$	$	54.04%
Book value of equity	$3,724,000	$2,660,000	%
Market Value Added (MVA)	$	$7,847,000	%

Metric	Year 2	Year 1	Percentage Change
EVA Calculation
Net operating profit after-tax (NOPAT)	$831,600	$	%
Investor-supplied operating capital	$	$	40.00%
Weighted average cost of capital	7.98%	7.30%
Dollar cost of capital	$	$	53.04%
Return on invested capital (ROIC)	%	%	-14.63%
Economic Value Added (EVA)	$192,959	$	%

Using the change in Western G&Es EVA as the decision criterion, which type of investment recommendation should you make to your clients?

A hold recommendation

A sell recommendation

A buy recommendation

Which of the following statements are correct? Check all that apply.

The percentage change in Western G&Es EVA indicates that management has decreased its value.

The percentage change in Western G&Es MVA indicates that its management has increased the firms value.

Western G&Es NCF is calculated by adding its annual interest expense to the corresponding years net income.

For any given year, one way to compute Western G&Es EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital.

An increase in the number of common shares outstanding must increase the market value of the firms equity.