Chapter 4 Measuring Corporate Performance ormane Here are simpied financial sate

Question

Chapter 4 Measuring Corporate Performance ormane Here are simpied financial sateaments for Wateran Corporation: INCOME STATEMENT (Figures in $ millions) Net sales Cost of goods sold Depreciation Earnings before interest and taxes (EBIT) Interest expense Income before tax Taxes Net income $881 741 31 109 12 97 34 63 BALANCE SHEET (Figures in $ millions) End of Year Start of Year Assets $369 $312 Current assets Long-term assets 258 $627 $534 Total assets Liabilities and shareholders' equity Current liabilities Long-term debt Shareholders' equity $194 108 325 $627 $157 121 256 $534 Total liabilities and shareholders' equity The company's cost of capital is 85%.(L04.2) a. Calculate Watervan's economic value added (EVA). b. What is the company's return on capital? (Use start-of-year rather than average capital.) c. What is its return on equity? (Use start-of-year rather than average equity.) d. Is the company creating value for its shareholders?

Explanation / Answer

a) EVA = NOPAT - (WACC * capital invested) Watervan's EVA = 63 - [(108+325)*0.085] m = 63 - 36.81 = $26.19m b) ROC = NI / capital = 63 / (325 + 108)= 14.55% c) ROE = NI / Equity = 63/325 = 19.38% d) Yes, the company is in profit and creating value for its shareholders. The Shareholder's equity value has increased from $256m previous year to $325m this year.

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