Question

Value added to a firm Financial statements reflect only book values of the data that analysts use to evaluate a company's performance. To incorporate market values, two additional performance measures were developed-market value added (MVA) and economic value added (EVA). Which performance measure evaluates the amount by which profits exceed or fall short of the cost of capital in any one period? Market value added Economic value added Consider this case: Last year, Jackson Tires reported net sales of $80 million and total operating costs (including depreciation) of $52 million. Jackson Tires has $115 million of investor-supplied capital, which has an after-tax cost of 7.5%. If Jackson Tires's tax rate is 40%, how much value did its management create or lose for the firm during the year? $2.66 million $39.38 million $8.18 million $60.38 million According to Jackson Tires's balance sheet, the firm has $120 million of total common equity (common stock plus retained earnings). The firm has 20 million shares of common stock outstanding, and the current stock price is $30.00. What is Jackson Tires's current MVA? $576 million $408 million $592 million $480 million

Answer 1

a	EVA mesures the amount by which profit exceeds or falls
	short of cost of invested capital.
b	Jason tires
	Sales	80,000,000
	Opearting cost	52,000,000
	Pretax Profit	28,000,000
	Tax @40%	11,200,000
1	Post Tax Income	16,800,000
	Capital invested	115,000,000
	After Tax cost of capital	7.5%
2	Amount of cost of capital	8,625,000
	Value created by management=1-2=	8,175,000
	So answer is $ 8.18 million
c
	Common equity book value	120,000,000
	Outstanding common equity	20,000,000
	Share price	30
	Market value of Jason Tires	600,000,000
	MVA=Market Value-Invested Capital=	480,000,000
	So Answer is $480 million