Please use the information below for the next three questions. EBIT = $80 Tax ra
ID: 2705095 • Letter: P
Question
Please use the information below for the next three questions.
EBIT = $80
Tax rate = 30%
Net investment in operating capital = $400
(book also calls it total net
operating capital and operating
capital)
WACC = 12%
Book value of debt = $200
Equity supplied by investors = $200
Shares outstanding = 10
Price of stock = $19
Market value of debt = $205
1. Calculate EVA, in percent.
a) -6.00%
b) -2.00%
c) 2.00%
d) 4.50%
e) 6.00%
f) 12.00%
g) 14.00%
2. Calculate market value added (MVA).
a) -$15.00
b) -$5.00
c) $0.00
d) $5.00
e) $15.00
f) $20.00
g) $190.00
h) $200.00
3. Using just the notion of whether EVA and MVA are positive or negative, does it appear that investors are properly valuing the firm based on the MVA calculated in question 2 assuming the EVA determined in question 1 will continue in the future? (Hint: remember class discussion and the relationship between EVA and MVA.)
a) Yes
b) No
Explanation / Answer
1.
EVA = NOPAT - WACC x Capital Employed = 80(1-0.3) - 12% of 400 = $2
EVA in % = (2/400)*100 = 2 %
2.
MVA = Market Value of Firm - Capital Invested = (205 + 19*10_ - 400 = -$5
3. b)NO
Since the firm has a posive EVA but in the future it will not be able to continue because the firm has negative MVA.