Question

Problem #2 (Economic Value Added): Tom's 2019 financial statements are below. 1. Calculate the Economic Value Added (EVA) for Tom, using the equation we calculated in class. (Assume WACC is 8.99%) 2. Suppose Tom's competitor is Whole Foods and its EVA is $50.5 million. Write 3-5 sentences evaluating your findings. Income Statement (Millions of $) Balance Sheet (Millions of $) Assets Cash and securities Accounts receivable Inventories 2019 $2,145.00 $8,970.00 $12,480.00 $23,595.00 Total current assets Net plant and equipment Total assets Net sales Operating costs except depreciation Depreciation Earnings before interest and taxes (EBIT) Less interest Earnings before taxes (EBT) Taxes Net income 2019 $58,500.00 $54,698.00 $1,025.00 $2,779.00 $829,00 $1,950.00 $682.00 $1,268.00 $15,405.00 $39,000.00 Liabilities and Equity Accounts payable Accruals Notes payable Total current liabilities Long-term bonds Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity $7,410.00 $4,290.00 $5,460.00 $17,160.00 $7,800.00 $24,960.00 $5,460.00 $8,580.00 $14,040.00 $39,000.00 Other data: Shares outstanding millions) Common dividends (millions of $) Intrate on notes payable & L-T bonds Federal plus state income tax rate Year-end stock price 500 $443.63 6.25% 35% $30.42

Answer 1

Answer 1

Economic Value Added (EVA) = NOPAT - (WACC x Capital Employed)

NOPAT = Net Operating Income After Tax

NOPAT = Profit After Tax + Interest - Tax Benifit

NOPAT = 1268 + 829 - (829*35%) = $1806.35

WACC = Weighted Average Cost of Capital.

Here, WACC = 8.99%

Capital Employed = Total Assets - Current Liabilities

Capital Employed = $39000 - $17160 = $21840

So, EVA = 1806.35 - (8.99 x 21840) = 1806.35 - 1963.42 = $-157.07 million

As the company is having a negative EVA of $-157.07 million it means that it is not generating value from the funds that have been invested into the business.

Answer 2

Tom's competitor - Whole Foods is having an EVA of $50.5 million which means it is having a positive return over the cost of capital of the business. It shows that Tom's competitors - Whole foods are producing value from the funds that have been invested in their business.