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Problem 3-23 Fiterman Inc. has the following summarized financial statements ($000): INCOME STATEMENT Revenue $25,970 Cost/Expense...

Problem 3-23

Fiterman Inc. has the following summarized financial statements ($000):

INCOME STATEMENT
Revenue $25,970
Cost/Expense    16,039
EBIT $  9,931
Interest (8%)    1,210
EBT $  8,721
Tax (35%)    3,052
Net income $  5,669
BALANCE SHEET
Assets Liabilities&Equity
Current Assets $  8,217 Current Liabilities $  7,042
Fixed Assets 30,636 Debt $17,167
Equity 14,644
Total Capital $31,811
Total Assets $38,853 Total Liab&Equity $38,853

Fiterman’s equity investors have typically demanded an expected return of at least 25% before they will buy the company’s stock. Evaluate Fiterman’s performance using both ROE and EVA® approaches. Do not round intermediate calculations. Round your answer for ROE to one decimal place, don't include the "%". Round your answer for EVA® to the nearest dollar, don't include the "$".

ROE    %

EVA®     $

Solutions

Expert Solution

(a)

Return on equity = (Net Income/ Equity)*100

= (5669/14644)*100

= 38.7%

Therefore ROE is 38.7

(b)

Economic Value Added= Net Operating Profit After Tax - (Weightage Avg. Cost of Capital * Capital Employed)

Net Operating Profit After Tax = Earning before Interest and Tax * (1- tax rate)

= 9931*(1-0.35)

=$ 6455.15

Capital Employed= DEBT + EQUITY

= 17167+14644

= $ 31811

Cost of debt after considering tax = 8%(1-tax rate)

= 8*0.65

= 5.2%

Weightage Avg. Cost of Capital = Cost of debt* (Weightage of debt/ Total of debt and equity)

+ Cost of equity * (Weightage of debt/ Total of debt and equity)

= 5.2%* (17167/31811) + 25%( 14644/31811)

= 2.806% + 11.509%

= 14.315%

Therefore

EVA = 6455.15 - (31811*14.315%)

= 6455.15 - 4553.74

= 1901 ROUND OFF

In the given case, return on equity (38.7%) is higher than is higher than the desired rate of return(25%)

Further EVA is also Positive.

Therefore, performance of Fiterman Inc. is good.

  

jeff jeffy answered 2 years ago
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