Question

11. The calculation of a firm's Market Value Added (MVA) and EconomicValue Added (EVA) Asher, your newly appointed boss, has tasked you with evaluating the following financial data for Atherton Corp. to determine how Atherton's 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 Atherton's 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 firm's value has changed, and he has provided you with the following income statement and balance sheet. Atherton Corp. Income Statement January 1 - December 31, Year 2 Sales Expenses EBITDA Depreciation and amortization expense EBIT Interest expense EBT Tax expense (40%) Net income Common dividends Addition to retained earnings Excludes depreciation and amortization Year 2 $9,350,000 7,480,000 $1,870,000 327,250 $1,542,750 280,500 $1,262,250 504,900 $757,350 $454,410 $302.940 Year 1 $8,500,000 5,970,000 $1,530,000 297,500 $1,232,500 212,500 $1,020,000 408,000 $612,000 $367,200 $244,800 Atherton Corp. Balance Sheet

Answer 1

Completed table:

	year2	year1	Percentage change
Sales	$     93,50,000	$     85,00,000	10.00%
Net Income	$       7,57,350	$       6,12,000	23.75%
Net Cash Flow	$     10,84,937	$       9,09,500	19.29%
Net operating Working Capital	$     33,66,266	$     29,27,187	15.00%
Earning per share	$               1.17	$               1.08	7.61%
Dividend per share	$               0.70	$               0.65	7.61%
Book value per share	$               5.00	$               5.00	0.00%
Cash flow per share	$               1.67	$               1.61	3.73%
Market price per share	$             20.74	$             19.75	5.01%
MVA Calculation
Market value of equity	$ 1,34,81,767	$ 1,11,63,688	20.76%
Book value of equity	$     32,50,187	$     28,26,250	15.00%
Marked value added	$ 1,02,31,580	$     83,37,438	22.72%
EVA Calculation
Net operating profit after tax	$       9,25,650	$       7,39,500	25.17%
Investor supplied operating capital	$     92,86,250	$     80,75,000	15.00%
WACC	7.98%	7.30%
Dollar cost of capital	6.00%	4.77%	25.71%
Return on Invested capital	9.97%	9.16%	8.85%
Economic value added	$       3,68,262	$       3,53,942	4.05%

As we can see from the table, Economic value added has increased for the Atherton, so its a buy recommendation.

Of the given statement, correct statement are statement 4 and 5, As change is EVA indicates that management has increased its value and Ni is growing at a rate greater than its sales.

EVA is difference between NOPAT and product of its operating capital and its dollar cost of capital.