h 06: Assignment - Accounting for Financial Management Atherton Corp Atherton Corp. Income Statement Balance Sheet January 1 - December 31, Year 2 December 31, Year 2 Year 2 Year 2 Year 1 Assets: Year 1 Sales $9,975,000 $9,500,000 Cash and cash equivalents $731,025 $541,500 Expenses1 7,980,000 Receivables 2,436,750 7,790,000 1,805,000 Inventory 4,264,313 3,158,750 BITDA 1,995,000 1,710,000 Depreciation and amortization expense Current assets 349,125 332,500 7,432,088 5,505,250 Net fixed assets 4,751,662 3,519,750 BIT 1,645,875 1,377,500 Interest expense 299,250 Total assets $12,183,750 $9,025,000 237,500 Liabilities and Equity: T 1,346,625 1,140,000 Accounts payable $1,827,563 $1,353,750 Tax expense (40%) 538,650 456,000 ccruals 879,938 1,187,916 Net income $807,975 $684,000 Notes payable 2,558,588 1,895,250 Common dividends $484,785 $410,400 Total current liabilities 5,574,067 4,128,938 Addition to retained earnings $273,600 $323,190 Long-term debt 2,345,372 1,737,313 1Excludes depreciation and amortization Total liabilities 7,919,438 5,866,250 Common stock ($1 par) 852,862 631,750 Retained earnings 3,411,450 2,527,000 Total equity 4,264,312 3,158,750 Total debt and equity $12,183,750 $9,025,000 Shares outstanding 852,862 631,750 Weighted average cost of capital 7.98% 7.30% Ch 06: Assignment - Accounting for Financial Management Using the change in Atherton's EVA as the decision Company Growth and Performance Metrics Percentage criterion, which type of investment recommendation should you make to your clients? Change Metric Year 2 Year 1 General Metrics O A sell recommendation OA hold recommendation Sales $9,975,000 $9,500,000 OA buy recommendation Net income $807,975 $684,000 Net cash flow (NCF) $1,016,500 Which of the following statements are correct? Check all Net operating working capital (NOowc) $4,416,609 that apply Earnings per share (EPS) $1.08 Atherton's NCF is calculated by adding its annual Dividends per share (DPS) $0.57 interest expense to the corresponding year's net income Book value per share (BVPS) $5.00 0.00% Cash flow per share (CFPS) -15.53% The percentage change in Atherton's MVA Market price per share $21.73 $19.75 indicates that its management has increased the firm's value. MVA Calculation Other things remaining constant, Atherton's EVA Market value of equity 48.53% will increase when its ROIC exceeds its WACC. Book value of equity $4,264,312 $3,158,750 For any given year, one way to compute Market Value Added (MVA) $9,318,313 Atherton's EVA is as the difference between its EVA Calculation NOPAT (such as $826,500) and the product of its Net operating profit after-tax (NOPAT) $987,525 operating capital ($6,791,312) and its weighted average cost of capital ($7.30) An increase in the number of common shares outstanding must increase the market value of the firm's equity Investor-supplied operating capital 35.00% Weighted average cost of capital 7.98% 7.30% Dollar cost of capital 47.58% Return on invested capital (ROIC) -11.50%
