Josh, your newly appointed boss, has tasked you with evaluating the following fi
ID: 2820138 • Letter: J
Question
Josh, your newly appointed boss, has tasked you with evaluating the following financial data for Galaxy Corp. to determine how Galaxy'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 Galaxy'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. Income Statement Balance Sheet Cash and cash equivalents $8,662,500 6,930,000 1,732,500 303,188 1,429,312 259,875 $8,250,000 $564,300 $470,250 3,291,750 5,737,050 EBITDA Depreciation and amortization expense 288,750 1,196,250 206,250 99D,000 396,000 4,780,875 3,056,625 $9,405,000 $7,837,500 EBIT Net fixed assets Liabilities and Equity: Accounts payable $1,410,750 916,988 1,975,050 $1,175,625 764,156 10% 467,775 Net income Common dividends Addition to retained earnings Excludes depreciation and amortization Notes payable $420,997 $2B0,665 $356,400 $237,600 Total current liabilities 3,585,656 Total iabilities Common stock ($1 par) 6,113,250 5,094,375 2,194,500 2,743,125 $9,405,000 $7,837,500 Total 3,291,750 Total debt and equity 65B, 350 Weighted average cost of capital To fadilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to twa Using the change in Galaxy's EVA as the decision criterion, which type of investment recommendation should you make to your dlie Company Growth and Performance Metrics Pe Year Year ch General Metrics O A hold recommendation O A buy recommendation O A sell recommendation Sales $8,662,500 $8,250,000 Netcash fiow (NCF) Net operating working capital (NOWC) which of the follawing statements are correct? Check a that a $3,409,312 An increase in the number of common shares Dividends per share (DPS) Book value per share (BVPS) Cash flow per share (CFPS) Market price per share outstanding must increase the market value of the firm's equity -4.97% The percentage change in Galaxy's MVA indicates $21.73 that its management has increased the firm's value. The percentage change in Galaxy's EVA indicates th MVA Calculation Market value of equity Book value of equity Market Value Added (MVA) 32.03% at management has increased its value. Galaxy's NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year's EBITDA $3,291,750 $2,743,125 EVA Calculation Net operating profit after-tax (NOPAT) Investor-supplied operating capital Weighted average cost of capital Dollar cost of capital Return on invested capital (ROIC) Economic Value Added (EVA) For any given year, one way to compute Galaxy's EVA is as the difference between its NOPAT (such as $717,750) and the product of its operating capital ($5,897,719) and its weighted average cost of capital$7.3D). 20.00% 7.9B% 31.18% -0.41% $292,999SExplanation / Answer
The table is as shown below:
Sell recommendation since EVA is decreasing
Corrct options are (3) and (5)
Year2 Year 1 % Change Sales 8662500.00 8250000.00 5.00% Net Income 701662.00 594000.00 18.12% NCF 1004850.00 882750.00 13.83% EPS 1.07 1.08 -1.32% DPS 0.64 0.43 47.78% BVPS 5.00 5.00 0.00% CFPS 1.53 1.61 -5.14% Market price per share 21.73 19.75 10.03% Market value of equity 14305945.50 10835343.75 32.03% Book value of equity 3291750.00 2743125.00 20.00% MVA 11014195.50 8092218.75 36.11% NOPAT 857587.20 717750.00 19.48% Investor supplied operating capital 2468813.00 2057344.00 20.00% WACC 0.08 0.07 Dollar cost of capital 197011.28 150186.11 31.18% ROIC 0.35 0.35 -0.43% EVA 262999.00 287216.51 -8.43%Related Questions
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