Here are simplified financial statements for Watervan Corporation: INCOME STATEM

Question

Here are simplified financial statements for Watervan Corporation: INCOME STATEMENT (figures in $millions) Net sales $901 Cost of goods sold 761 Depreciation 51 earning before interest and taxes $89 interest expense 32 incomes before tax $57 taxes 27 Net income $30

BALANCE SHEET (figures in $million) Assets end of year 389 start of year 352 long term assets end of ear 298 start of year 242 total assets end of year 687 start of year 594 liabilities and shareholders' equity current liabilities end of year 214 start of year 177 long-term debt end of year 128 start of year 141 shareholders' equity end of year 345 start of year 240 total liabilities & shareholders' equity end of year 687 start of year 558.

The company's cost of capital is 7.50%

a. Calculate Watervan's economic value added. (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 crating value for its shareholders?

Explanation / Answer

(a)

Economic value added(EVA) = NOPAT - (WACC* total invested capital)

NOPAT= EBIT*(1-tax rate)

= 89 * (1-0.4737)

= 46.84

46.84-(0.075*381)

EVA=18.265

(note:- capital is taken from start of the year because it is assumed that profit are generated from the starting capital which is long term debt = 141 and equity = 240)

(b)

return on capital = net income/(debt + equity)

= 30/381

Return on capital = 7.87%

(c)

Return on equity = Net income / shareholder's equity

= 30/240

Return on equity=12.5%

(note:- debt and equity in question b and c are used from start of the period as stated in question)

(d)

Yes, company is creating value for its shareholders, EVA number is positive and return of capital number is also higher than cost of capital so we can say that company is creating value for its shareholders.

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