Question

Problem 4-3 Measuring Performance (LO2)

Here are simplified financial statements for Watervan Corporation:

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	890.00
Cost of goods sold		750.00
Depreciation		40.00
Earnings before interest and taxes (EBIT)	$	100.00
Interest expense		21.00
Income before tax	$	79.00
Taxes		27.65
Net income	$	51.35

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Current assets	$	378			$	330
Long-term assets		276				231
Total assets	$	654			$	561
Liabilities and shareholders’ equity
Current liabilities	$	203			$	166
Long-term debt		117				130
Shareholders’ equity		334				265
Total liabilities and shareholders’ equity	$	654			$	561

The company’s cost of capital is 9%.

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?

• Yes

• No

Answer 1

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