For the company you selected, describe your company’s operations and the market
ID: 2756906 • Letter: F
Question
For the company you selected, describe your company’s operations and the market in which it operates. Search for the EVA, and free cash flow using the firm’s annual report. Define their respective meanings and how your firm is performing in these areas. Indicate the firm’s ROA and ROE and explain the difference between the two measures. You must submit documentation showing how answers were reached. Note the following for your report: EVA=EBIT (1-T)- (Total investors capital x after-tax cost of capital) Free Cash Flow = EBIT(1-T) + Depreciation - (Capital Expenditures+ Increase in Net Working Capital) Please show me how to figure out
Explanation / Answer
Wal-Mart
For the year ended January 2012.
EVA=EBIT (1-T) - (shareholders equity x after-tax cost of capital)
EVA = $26.72 x 1-.33 – 71.315*.07 = 17.90-5 = $12.9 billion
Tax rate = 7.944/24.398 = 32.56 founded to 33%
Total Shareholders Equity = 71.315 billion
Cost of Capital is based on CAPM and the current beta of .39, as follows:
3%+.39*12.5-3 = 6.71rounded to 7%
Free Cash Flow = EBIT (1-T) + Depreciation - (Capital Expenditures+ Increase in Net Working Capital)
FCF = 17.9+8.13-13.51-1.78 = $10.74 billion.
The company is expected to generate a profit of around $5 billion as per the return on shareholders’ equity but the company has generated profit of around $17.9 billion of profit for the year ended Jan 2012, it means that the company has generated additional profit of $12.9 billion which has added the value of the company. The EVA tells the company profitability as compared to average earnings of the industry. As high as the EVA is, it means that the company is doing well, thus the chance of increase in market price of company shares. The Free cash flow tells the amount available to shareholders which is available to pay dividend. It is calculated after deducting all necessary cash requirement to pay for investment in fixed assets and working capital. More the free cash flow is available; more the company can pay the dividend.