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 

Longterm assets 
298 
242 

Total assets  $ 
687 
$ 
594 

Liabilities and shareholders’ equity  
Current liabilities  $ 
214 
$ 
177 

Longterm 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 startofyear 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 startofyear 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)
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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