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12. The calculation of a firm's Market Value Added (MVA) and Economic Value Added (EVA) As Aan Josh, your newly appointed boss, has tasked you with evaluating the following financial data for Western Gas & Electric Co. to determine how Western GSE'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 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, Year 2 Year 2 Sales $10,350,000 Expenses! 8,280,000 EBITDA 2,070,000 Depreciation and amortization expense 362,250 1,707,750 Interest expense 310,500 EBT 1,397,250 Tax expense (40%) 558,900 Net income $838,350 Year 1 $9,000,000 7,380,000 1,620,000 315,000 1,305,000 225,000 1,080,000 432,000 $648,000 EBIT Western Gas & Electric Co. Balance Sheet December 31, Year 2 Assets Year 2 Cash and cash equivalents $641,250 Receivables 2,137,500 Inventory 3,740,625 Current assets 6,519,375 Net fixed assets 4,168,125 Total assets $10,687,500 Liabilities and Equity Accounts payable $1,603,125 Accruals 1,042,031 Notes payable 2,244,375 Total current liabilities 4,889,531 Long-term debt 2,057,344 Total liabilities 6,946,875 Common stock ($1 par) 748,125 Retained earnings 2,992,500 Total equity 3,740,625 Total debt and equity $10,687,500 Year 1 $513,000 1,710,000 2,992,500 5,215,500 3,334,500 $8,550,000 Common dividends Addition to retained earnings Excludes depreciation and amortization $503,010 $335,340 $388,800 $259,200 $1,282,500 833,625 1,795,500 3,911,625 1,645,875 5,557,500 598,500 2,394,000 2,992,500 $8,550,000 Shares outstanding Weighted average cost of capital 748,125 7.98% 598,500 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to two decimal places Company Growth and Performance Metrics Metric Year 1 Year 2 General Metrics $10,350,000 $838,350 Using the change in Western GSE's EVA as the decision Percentage criterion, which type of investment recommendation Change should you make to your clients? A buy recommendation O A hold recommendation A sell recommendation $9,000,000 $648,000 $963,000 $3,874,219 Sales Net Income Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) Cash flow per share (CFPS) Market price per share $1.08 $0.67 $5.00 0.00% 0.00% $19.75 $20.74 MVA Calculation 31.27% Market value of equity Book value of equity Market Value Added (MVA) $3,740,625 $2,992,500 $8,827,875 Which of the following statements are correct? Check all that apply. Investor supplied operating capital is recorded as accounts payable, accruals, and short-term investments Westem GSE's NCF is calculated by adding its annual interest expense, to the corresponding year's net income. The percentage change in Western GSE's EVA Indicates that management has increased its value Western Ge's net income is growing at a rate greater than its sales. This could imply that either its revenues are growing more quickly than its expenses or that management is being effective in managing its costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm For any given year, one way to compute Westem GHE'S EVA is as the difference between its NOPAT (such as $783,000) and the product of its operating capital (56,433,875) and its weighted average cost of capital (57.30) EVA Calculation $1,024,650 25.00 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) 7.989 7.30% 36.649 4.68% $382,816 Josh, 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 GBE'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, Year 2 Year 2 Sales $10,350,000 Expenses 8,280,000 EBITDA 2,070,000 Depreciation and amortization expense 362,250 EBIT 1,707,750 Interest expense 310,500 1,397,250 Tax expense (40%) 558,900 Net income $838,350 Common dividends $503,010 Addition to retained earnings $335,340 Excludes depreciation and amortization Year 1 $9,000,000 7,380,000 1,620,000 315,000 1,305,000 225,000 1,080,000 432,000 $648,000 Year 1 $513,000 1,710,000 2,992,500 5,215,500 3,334,500 $8,550,000 EBT Western Gas & Electric Co. Balance Sheet December 31, Year 2 Assets: Year 2 Cash and cash equivalents $641,250 Receivables 2,137,500 Inventory 3,740,625 Current assets 6,519,375 Net fixed assets 4,168,125 Total assets $10,687,500 Liabilities and Equity! Accounts payable $1,603,125 Accruals 1,042,031 Notes payable 2,244,375 Total current liabilities 4,889,531 Long-term debt 2,057,344 Total liabilities 6,946,875 Common stock (1 par) 748,125 Retained earnings 2,992,500 Total equity 3,740,625 Total debt and equity $10,687,500 Shares outstanding 748,125 Weighted average cost of capital 7.98% $388,800 $259,200 $1,282,500 833,625 1,795,500 3,911,625 1.645,875 5,557,500 598,500 2,394,000 2,992,500 $8,550,000 598,500 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to two decimal places To facilitate your analysis, complete the following table, and use the results to answer the related questions, Round your percentage change answers to two decimal places Company Growth and Performance Metrics Using the change in Western G&E's EVA as the decision Percentage criterion, which type of investment recommendation Metric Year 2 Year 1 Change should you make to your clients? General Metrics A buy recommendation Sales $10,350,000 $9,000,000 O A hold recommendation Net Income $838,350 $648,000 A sell recommendation Net cash flow (NCF) $963,000 Net operating working capital (NOWC) $3,874,219 Which of the following statements are correct? Check all that apply. Earnings per share (EPS) $1.08 Dividends per share (DPS) $0.67 Investor supplied operating capital is recorded as Book value per share (BVPS) $5.00 0.00% accounts payable, accruals, and short-term Investments. Ch flow per share (CFPS) 0.00% Western G&E's NCF is calculated by adding its Market price per share $20.74 $19.75 annual interest expense to the corresponding MVA Calculation year's net income Market value of equity 31.27% The percentage change in Western GBE's EVA Book value of equity $3,740,625 $2,992,500 Indicates that management has increased its Market Value Added (MVA) value $8,827,875 Western G&E's net income is growing at a rate EVA Calculation greater than its sales. This could imply that either Net operating profit after-tax (NOPAT) $1,024,650 its revenues are growing more quickly than its Investor supplied operating capital 25.00% expenses or that management is being effective in Weighted average cost of capital 7.98% 7.30% managing its costs while achieving the reported Dollar cost of capital 36.64% growth in sales. Other things remaining constant, Return on invested capital (ROIC) either event should increase the value of the firm. 4.68% For any given year, one way to compute Western Economic Value Added (EVA) $382,816 G&E'S EVA is as the difference between its NOPAT (such as $783,000) and the product of its operating capital (56,433,875) and its weighted average cost of capital ($7.30)

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