Alexis, your newly appointed boss, has tasked you with evaluating the following

Question

Alexis, your newly appointed boss, has tasked you with evaluating the following financial data for Western Gas & Electric Co. to determine how Western G&E'S value has changed over the past year. The investment firm for which you work will make a positive (or "buy") recommendation to its investing clients if Western G&E's value has increased over the past year, a neutral (or "hold") recommendation if the value has remained constant, or a negative (or "sell") recommendation if the value has decreased. He has recommended that you use several metrics to ascertain how the firm's value has changed, and he has provided you with the following income statement and balance sheet. Western Gas & Electric Co Income Statement January 1 - December 31, Year2 Western Gas& Electric Co Balance Sheet December 31, Year 2 Year 1 $9,712,500 9,250,000 7,585,000 1,665,000 323,750 Year 2 Year 2 $659,063 2,196,875 3,844,531 6,700,469 4,283,906 $10,984,375 Year 1 $527,250 1,757,500 3,075,625 5,360,375 3,427,125 $8,787,500 Sales Cash and cash equivalents Receivables Inventory 7,770,000 1,942,500 339,938 1,602,562 291,375 1,311,187 524,475 $786,712 $472,027 $314,685 nses EBITDA Depreciation and amortization expense Current assets Net fixed assets 231,250 1,110,000 444,000 $666,000 $399,600 $266,400 Total assets Liabilities and Equity: Accounts payable Interest expense Tax expense (40%) Net income Common dividends Addition to retained earnings 1Excludes depreciation and amortization 1,070,977 2,306,719 5,025,352 2,114,492 7,139,844 768,906 3,075,625 3,844,531 $10,984,375 768,906 7.98% $1,647,656 $1,318,125 856,781 1,845,375 4,020,281 1,691,594 5,711,875 615,125 2,460,500 3,075,625 $8,787,500 Notes payable Total current liabilities Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity Total debt and equity Shares outstanding Weighted average cost of capital 615,125 7.30% Type here to search

Explanation / Answer

Preparation of the company growth and performance metrics.We have,

Note1: Net cash flow = Net income + Depreciation

Note2: Net operating working capital = Total current asset - Account payable - Accruals

Note3: Earning per share = Net Income / Total share outstanding

Note4: Dividend per share = Total dividend / Total share outstanding

Note5: Book value per share = ( Total Asset - Total Liabilities) / Total share outstanding

Note6: Cash flow per share = Net cash flow / Total share outstanding

Note7: Market value of Equity = Market Value per share x Total share outstanding

Note9: Market value added = Market value of equity - Book value of equity

Note10: NOPAT = EBIT( 1 - Tax rate)

Note11: Investor supplied operating capital = Net operating working capital + Net Fixed Asset

Note12: Doller Cost of capital = Investor supplied operating capital x WACC

Note13: Return on Invested Capital = NOPAT / Investor supplied operating capital

Note14: EVA = NOPAT -  Doller Cost of capital

(a) As per EVA criterion of the Western G&E, we should give sell recommendation to the clients. It is because, EVA is decreasing by 6.24 % from the last year.

(b)

(1) Correct

(2) Correct

(3) False. Net cash flow is adding net income and depreciation expense for the year.

(4) False. Investor supplied operating capital = Net operating working capital + Net Fixed Asset

(5) Correct.

Particulars Year 2 Year 1 Percentage change Sales $ 9,712,500 $ 9,250,000 5.00 % Net Income $ 786,712 $ 666,000 18.12 % Net Cash Flow $ 1,126,650 $ 989,750 13.83 % Net Operating Working Capital $ 3,981,836 $ 3,185,469 25.00 % Earning per share $ 1.02 $ 1.08 - 5.55 % Dividend per share $ 0.61 $ 0.65 - 6.15 % Book value per share $ 5.00 $ 5.00 0.00 % Cash Flow per share $ 1.47 $ 1.61 - 8.70 % Market Price per share $ 20.74 $ 19.75 5.01 % MVA Calculation: Market value of Equity $ 15,947,110 $ 12,148,719 31.27 % Book value of Equity $ 3,844,531 $ 3,075,625 25.00 % Market Value Added(MVA) $ 12,102,579 $ 9,073,094 33.39 % EVA Calculation: NOPAT $ 961,537 $ 804,750 19.48 % Investor supplied operating capital $ 8,265,742 $ 6,612,594 25.00 % WACC 7.98% 7.30% Doller Cost of capital $ 659,606 $ 482,719 36.64% Return on Invested Capital 11.63 % 12.17 % - 4.44 % Economic Value Added(EVA) $ 301,931 $ 322,031 - 6.24 %

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.