The company's cost of capital is 8.5%. a. Calculate Watervan's economic value added (EVA) b. what is the company's return on capital? (use start-of-year rather than average capital) c. what is its return on equity? (use start-of-year rather than average equity.) d. is the company creating value for its shareholders?

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Chapter1: Investments: Background And Issues
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Class book:  Fundamentals of Corporate Finance by Brealey, Myers, and Marcus

Measuring Performance. Here are simplified financial statements for Watervan Corporation:

                                                          Income Statement

                                                          (Figures in $ millions)

Net Sales                                                                                                                      $880

Cost of goods sold                                                                                                           741

Depreciation                                                                                                                       31

Earnings before interest and taxes (EBIT)                                                                       109

Interest expense                                                                                                                 12

Income before taxes                                                                                                            97

Taxes                                                                                                                                   20

Net Income                                                                                                                          77                                              

 

 

                                                                      Balance Sheet

                                                                   (Figures in $ millions)

                                                                                                                 End of Year             Start of Year

Assets

   Current assets                                                                                           $369                            $312

   Long-term assets                                                                                          258                             222

           Total Assets                                                                                          $627                              $534

Liabilities and shareholders' equity

    Current liabilities                                                                                           $194                             $157

    Long-term debt                                                                                                108                               121

    Shareholders' equity                                                                                        325                               256

          Total liabilities and shareholders' equity                                                   $627                              $534

 

The company's cost of capital is 8.5%.

a. Calculate Watervan's economic value added (EVA)

b. what is the company's return on capital? (use start-of-year rather than average capital)

c. what is its return on equity? (use start-of-year rather than average equity.)

d. is the company creating value for its shareholders?

 

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