Question

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Problem #2 (Economic Value Added): Tom's 2019 financial statements are below. 1. Calculate the Economic Value Added (EVA) for Tom, using the equation we calculated in class. (Assume WACC is 8.99%) 2. Suppose Tom's competitor is Whole Foods and its EVA is $50.5 million. Write 3-5 sentences evaluating your findings. Income Statement (Millions of $) Balance Sheet (Millions of $) Assets Cash and securities Accounts receivable Inventories 2019 $2,145.00 $8,970.00 $12,480.00 2019 $58,500.00 $54,698.00 $1,025.00 Total current assets $23,595.00 $2,779.00 Net sales Operating costs except depreciation Depreciation Earnings before interest and taxes (EBIT) Less interest Earnings before taxes (EBT) Taxes Net income Net plant and equipment Total assets $15,405.00 $39,000.00 $829.00 $1,950.00 $682.00 $1,268.00 Liabilities and Equity Accounts payable Accruals Notes payable Total current liabilities Long-term bonds Total liabilities Common stock Retained carnings Total common equity Total liabilities and equity $7,410.00 $4,290.00 $5,460.00 $17,160.00 $7,800.00 $24,960.00 $5,460.00 $8,580.00 $14,0-40.00 $39,000.00 Other data: Shares outstanding (millions) Common dividends (millions of 5) Intrate on notes payable & L-T bonds Federal plus state income tax rate Year-end stock price 500 $143.63 6.25% 35% $30.42

Answer 1

Answer:

1. Economic Value Added = -157.07

Working Notes:

		2019
Net Operating Profit After Tax (NOPAT) = EBIT (1-Tax Rate	EBIT	2,779.00
	Tax rate @ 35%	0.35
	EBIT (1-Tax Rate)	1,806.35
	After Tax operating income=	1,806.35
Economic Value Added (EVA) = NOPAT - (Total Assets - Current Liabilities )*WACC
	NOPAT =	1,806.35
	Total Assets=	39,000.00
	Current Liabilities =	17,160.00
	WACC =	8.99%
EVA =	1806.35 - (39000-17160)*8.99%	(157.07)

2.Tom's competitor is Whole Foods and its EVA is positive. A positive EVA shows a company is producing value from the funds invested in it. The goal of EVA is to quantify the charge, or cost, of investing capital into a certain project or firm and to then assess whether it generates enough cash to be considered a good investment. The charge represents the minimum return that investors require to make their investment worthwhile. A positive EVA shows a project is generating returns in excess of the required minimum return.