Question

# Here are simplified financial statements for Watervan Corporation: INCOME STATEMENT (Figures in \$ millions) Net sales...

Here are simplified financial statements for Watervan Corporation:

 INCOME STATEMENT (Figures in \$ millions) Net sales \$ 901.00 Cost of goods sold 761.00 Depreciation 51.00 Earnings before interest and taxes (EBIT) \$ 89.00 Interest expense 32.00 Income before tax \$ 57.00 Taxes 11.97 Net income \$ 45.03
 BALANCE SHEET (Figures in \$ millions) End of Year Start of Year Assets Current assets \$ 389 \$ 352 Long-term assets 298 242 Total assets \$ 687 \$ 594 Liabilities and shareholders’ equity Current liabilities \$ 214 \$ 177 Long-term debt 128 141 Shareholders’ equity 345 240 Total liabilities and shareholders’ equity \$ 687 \$ 558

The company’s cost of capital is 8.5%.

a. Calculate Watervan’s economic value added (EVA). (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

b. What is the company’s return on capital? (Use start-of-year rather than average capital.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. What is its return on equity? (Use start-of-year rather than average equity.) (Enter your answer as a percent rounded to 2 decimal places.)

d. Is the company creating value for its shareholders?

a.

EVA = EBIT(1 - Tax%) - (Cost of capital × Total Capitalization)

• Total capitalization = Long term debt + Shareholder's equity

Tax rate = 11.97/57 = 21%

Total capitalization =\$(141 + 240) =\$ 381 millions

EVA = [(89 × (1 - 21%)) - ( 8.5% ×381)] millions

=\$( 70.31 - 32.385) millions

=\$ 37.925 millions

=\$ 37.93 millions

b.

Return on capital = (EBIT×( 1 - tax%)/(Total Capitalization)

= (89 ×(1 - 21%))/381

= 70.31/ 381

= 0.18454068241

= 0.1845

=18.45%

c.

Return on equity = Net income/Shareholder's equity

= 45.03/240

= 0.187625

= 18.76%

d.

Yes, the company is creating value for its shareholders.

Because the EVA is positive i.e. \$ 37.93 millions and ROC and ROE is greater than Cost of capital.

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