The following table gives abbreviated balance sheets and income statements for E
ID: 2720923 • Letter: T
Question
The following table gives abbreviated balance sheets and income statements for Estée Lauder Companies.
At the end of fiscal 2011 Estée Lauder had 206 million shares outstanding21 with a share price of $51.0. The company’s weighted-average cost of capital was about 11%.
a) Calculate the market value added. (Enter your answer in millions. Round your answer to 2 decimal places.)
b) Calculate the market-to-book ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c) Calculate the economic value added. (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)
d) Calculate the return on capital. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
At the end of fiscal 2011 Estée Lauder had 206 million shares outstanding21 with a share price of $51.0. The company’s weighted-average cost of capital was about 11%.
a) Calculate the market value added. (Enter your answer in millions. Round your answer to 2 decimal places.)
b) Calculate the market-to-book ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c) Calculate the economic value added. (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)
d) Calculate the return on capital. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
(a) Market value added (MVA) = Market value (MV) of equity - Book value (BV) of equity
MV of equity = (Current stock price x Number of common stock)
= ($51 x 206 million) = $10,506 million
MVA = $(10,506 - 2,728) million
= $7,778.00 million
(b) Market-to-Book ratio = MV of equity / BV of equity = $10,506 million / $2,728 million = 3.85
Tax rate = $333 million / $992 million = 0.34
(c) Economic value added (EVA) ($M) = [EBIT x (1 - Tax rate)] - [(Long run debt + BV of equity) x Cost of capital]
= [1,067 x (1 - 0.34)] - [(1,091 + 2,728) x 0.11] = (1,067 x 0.66) - (3,819 x 0.11) = 704.22 - 420.09
= 284.1
(d) Return on capital = Net income / (Long run debt + BV of equity) = $659 million / $3,819 million = 0.1726
= 17.26%
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