Question

In: Finance

a. At the end of 2015 Sylvan Inc. had 1,250,000 common shares outstanding, with market-to-book (M/B)...

a. At the end of 2015 Sylvan Inc. had 1,250,000 common shares outstanding, with market-to-book (M/B) ratio of 1.5 , Sylvan's 2015 Balance sheet had total assets of $60 millions and total liabilities (current and long-term) of $35 millions. What was Sylvan's Market Value Added in 2015?

b. At the end of 2015, XYZ Corp. had total assets of $8.5 million, Operating Margin of 16% and a Total Assets Turnover Ratio of 2.5 . In 2015, the company used $ 20 million of investor-supplies Net Operating Capital, its Weighted Average Cost of Capital (WACC) was 8.5%, and the income tax rate was 30%. What was the Economic Value Added (EVA) in 2015 ?

Expert Solution

A. In case of Sylvan Inc.

M/B Ratio is 1.5

Outstanding Shares 1250000

Total Assets = $60000000

Total Liabilities = $35000000

Net Worth = Total Assets - Total Liabilities

Net Worth = $60000000 - $35000000 = $ 25000000

Net Worth is book value of shares. Therefore, book value of outstanding share is $ 25000000.

Using M/B Ratio, Market Value = M/B Ratio * Book Value

Market Value = 1.5*$25000000

Market Value = $37500000

MARKET VALUE ADDED IN 2015 = MARKET VALUE - BOOK VALUE

MARKET VALUE ADDED IN 2015 = $37500000 - $25000000 = $12500000

B. In the case of XYZ Corp.,

Economic Value Added (EVA) = Net Operating Profit After Tax – (Capital Invested x WACC)

Total Assets	$8.5 Million
Operating Margin	16%
Total Assets Turnover Ratio	2.5
Investment	$20 Million
WACC	8.5%

First, we need to calculate Net Operating Profit After Tax with the help of Total Assets Turnover Ratio, Operating Margin & Tax Rate :

Total Assets Turnover Ratio = Net Sales /Total Assets

2.50 = Net Sales / $8.5 Million

Net Sales = $21.25Million

Now, we will calculate Operating Profit = Net Sales * Operating Margin = $21.25 Million * 16% = $ 3.4 Million

Net Operating Profit After Tax = Operating Profit After Tax * (1- Tax Rate)

Net Operating Profit After Tax = $ 3.4 Million * (1- .3)

Net Operating Profit After Tax = $ 2.38 Million

Economic Value Added (EVA) = Net Operating Profit After Tax – (Capital Invested x WACC)

Economic Value Added (EVA) = $2.38 Million – ($20 Million x 8.5%)

Economic Value Added (EVA) = $ 2.38 Million - $1.7 Million

Economic Value Added (EVA) = $0.68 Million

jeff jeffy answered 1 year ago

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