Homework Answers
Change = (Year 2 Value - Year 1 Value)/Year 1 Value. Other Formulas are mentioned in the column Formula
| Year 2 | Year 1 | Change | Formula | |
| Sales | 3,150,000 | 3,000,000 | 5.00% | In the Income Statement |
| Net Income | 255,150 | 216,000 | 18.13% | In the Income Statement |
| Net Cash Flow | 365,400 | 321,000 | 13.83% | Net Income + Depreciation & Amortization |
| Net Operating Working Capital | 1,446,375 | 1,033,125 | 40.00% | Current Assets - Accounts Payable - Accruals |
| Earnings per share | 0.91 | 1.08 | -15.74% | Net Income/Shares Outstanding |
| Dividents per share | 0.55 | 0.65 | -15.38% | Common dividends/Shares Outstanding |
| Book Value per share | 5.00 | 5.00 | 0.00% | Total Equity/Shares Outstanding |
| Cash flow pre share | 1.31 | 1.61 | -18.63% | Net Cash Flow/Shares Outstanding |
| Market Price per share | 21.23 | 19.75 | 7.49% | Given |
| MVA Calculation | ||||
| Market Value of Equity | 5,929,539 | 3,940,125 | 50.49% | Market Price per share * Shares Outstanding |
| Book Value of Equity | 1,396,500 | 997,500 | 40.00% | In the balance sheet |
| Market Value Added | 4,533,039 | 2,942,625 | 54.05% | Market Value of Equity - Book Value of Equity |
| EVA Calculation | ||||
| NOPAT | 311,850 | 261,000 | 19.48% | EBIT*(1-Tax Rate) |
| Investor-supplied operating Capital | 3,002,475 | 2,144,625 | 40.00% | Total Equities + Total Liabilities - Accounts Payable - Accruals |
| Weighted Average cost of capital | 7.98% | 7.30% | Given | |
| Dollar Cost of Capital | 239,490 | 156,488 | 53.04% | Weighted Average Cost of Capital*Investor-Supplied Operating Capital |
| Return on Invested Capital | 10.39% | 12.17% | -14.63% | NOPAT/Investor-Supplied operating Capital |
| EVA | 72,360 | 104,512 | -30.76% | NOPAT - Dollar Cost of Capital |
1) EVA as the decision criterion, firm's EVA has reduced from the previous year. Hence, it is recommended to sell the stock
2) Statement 1 is correct as growth of sales = 5% and growth of Net Income = 18.13%
Statement 2 is wrong. NCF is calculated as Net Income + Annual Depreciation & Amortization (not EBITDA + Annual Depreciation & Amortization)
Statement 3 is wrong. Number of shares is irrelevant to the determination of market value of equity
Statement 4 is wrong. EVA is increased if ROIC increases or WACC decreases not when ROIC > WACC. If ROIC > WACC, EVA would be positive
Statement 5 is correct. EVA = NOPAT - WACC*invested operating capital.
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