Question

Here are simplified financial statements for Watervan Corporation: INCOME STATEMENT (Figures in $ millions) Net sales Cost of goods sold Depreciation Earnings before interest and taxes (EBIT) Interest expense Income before tax Taxes Net income $899.00 759.00 49.00 $ 91.00 30.00 $ 61.00 12.81 $ 48.19 BALANCE SHEET (Figures in $ millions) End of Year Start of Year $ 387 294 $ 681 $ 348 240 $ 588 Assets Current assets Long-term assets Total assets Liabilities and shareholders' equity Current liabilities Long-term debt Shareholders' equity Total liabilities and shareholders' equity $ 212 126 343 - $ 681 $ 175 139 274 $ 588 The company's cost of capital is 8.5%.

Answer 1

Answer with working is given below

$91.00 Economic Value Added Earnings before tax and interest Less: Taxes @ 21% Net Operating profit after tax (NOPAT) Less: Weighted Average Cost of Capital Economic Value added (EVA) $19.11 $71.89 $35.11 $36.79 Tax rate Tax Income before tax Tax rate $12.81 $61.00 21.00% Weighted average cost of capital * Long term debt Shareholders equity Total Capital Cost of capital Weighted average cost of capital $139.00 $274.00 $413.00 A 8.50% B $35.11 AXB * Opening balance has been considered since same has been specified for b) and c) Company' Return on Capital b) Net Operating profit after tax Capital invested $71.89 $413.00 17.41% Capital invested Long-term debt Shareholders equity Total Capital invested $139.00 $274.00 $413.00 c) Return on Equity Net Income after taxes Shareholders' Equity $48.19 $274.00 17.59% d) Yes Company is creating value for shareholders' - EVA is positive - Return on Capital and Equity is higher than cost of capital Question No.2 $2,860 Total receivables Average receivable days Total Sales 20 days $52,195 (2,860/20 days *365 days) Asset Turnover Ratio Total Sales Total Assets $52,195.00 $71,500.00 0.73 Return on Assets (ROA) Operating profit Total Assets $2,609.75 $71,500.00 3.65% Operating profit Total Sales Operating profit margin 5.00% $52,195.00 $2,609.75