Question

Build a Model: Free Cash Flows, EVA, and MVA

Begin with the partial model in the file Ch06 P15 Build a Model.xls on the textbook’s Web site.

a. Using the financial statements shown below for Lan & Chen Technologies, calculate net operating working capital, total net operating capital, net operating profit after taxes, free cash flow, and return on invested capital for 2015. (Hint: Start with the partial model in the file and report all dollar figures in thousands to reduce clutter.)

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b. Assume there were 15 million shares outstanding at the end of 2015, the year-end closing stock price was $65 per share, and the after-tax cost of capital was 8%. Calculate EVA and MVA for 2015.

Lan & Chen Technologies: Income Statements for Year Ending December 31 (Thousands of Dollars)

Lan & Chen Technologies: December 31 Balance Sheets (Thousands of Dollars)

Answer 1

a.

Using the financial statements of L Technologies, following can be analyzed:

Net operating Working Capital (NOWC)(2015)

Net Operating Working Capital (NOWC) is excess of operating current assets (OCA’s) over operating current liabilities (OCL’s). it is computed as follows.

In order to compute NOWC, first of all OCA and OCL has to be computed.

Compute Operating Current Assets OCA’s for 2015 as follows:

Operating current assets amounts to

Compute Operating Current Liabilities OCL’s for 2015 as follows:

Thus, OCL’s amount to.

Compute NOWC for 2015 with the help of above computed figures as follows:

Thus, NOWC for 2015 amounts to

Net Operating Capital (NOC):

Net Operating capital (NOC’s) means amount of Operating Working Capital as increased by Operating Long Term Assets. It is calculated as follows-

Compute NOC for Year 2015 as follows:

Thus, the NOC for year 2015 amounts to

Net Operating Profit after Tax (NOPAT) (2015):

NOPAT is defined as profit which is earned based on productivity of an organization after considering tax effect and without considering non-productive activities items (such as cost of debt, profit/ loss on sale purchase of assets etc.)

It excludes the cost of debts and tax effect of debts. It is calculated by adding tax and interest in net income and then deducting tax applicable (except on debt portion) from such amount.

Compute L Technologies’ NOPAT for year 2015 as follows:

NOPAT amounts to.

Free Cash Flows (FCF):

FCF are the available amount with organization which shows positive flows after meeting all operating expenses and investment. It is amount which is derived by reducing investment in net operating capital from Net operating profit after tax (NOPAT), so it can be said that FCF are cash flows after considering investments made in Net Operating Capital during the year. It is calculated as follows.

Compute free cash flows for Year 2015:

Thus, the FCF for year2015 amounts to

*Net Operating Capital (NOCs) of year 2014:

So first calculate NOWC for year 2014:

OCA for year 2014:

OCL for year 2014:

NOWC for year 2014:

Now compute NOC for year 2014:

Return on Invested Capital (2015):

ROIC shows how well the organization using its capital and achieving returns with it and how well resources being utilized. It is compared with WACC of the organization to access how a company is using money to generate return. It is calculated as follows:

Compute L Technologies as follows:

Thus, L Technologies ROIC comes to, since it is a positive ROIC, this is favorable and shows organization operating investments are optimal.

b.

EVA and MVA were developed by a consulting firm S S & Co. EVA shows managerial effectiveness of Company as it as difference between NOPAT and cost of capital of company. This shows how well an Organization is being managed and how well Strategic Decisions are made. On the other hand MVA is a measure of shareholders wealth; it is difference between market value of equity stock and book value of equity. These same is computed as follows:

Compute L Technologies EVA for year 2015 as follows.

Thus EVA amounts to

Compute L Technologies MVA for year 2015 as follows:

First calculate MV of Equity Stock:

Thus, the market value of equity shares amounts to $975,000. Now compute Book value of Equity Shares:

Now compute MVA for year 2015 as follows:

Thus the MVA of L Technologies amounts to .