Question

Company Growth and Performance Metrics
Metric	Year 2	Year 1	Percentage Change
	General Metrics
Sales	$1,050,000	$1,000,000	%
Net income	$85,050	$72,000	%
Net cash flow (NCF)	$	$107,000	%
Net operating working capital (NOWC)	$361,594	$	%
Earnings per share (EPS)	$	$1.08	%
Dividends per share (DPS)	$0.73	$	%
Book value per share (BVPS)	$	$5.00	0.00%
Cash flow per share (CFPS)	$	$	8.07%
Market price per share	$21.73	$19.75	%
MVA Calculation
Market value of equity	$	$	15.53%
Book value of equity	$349,125	$332,500	%
Market Value Added (MVA)	$	$980,875	%
EVA Calculation
Net operating profit after-tax (NOPAT)	$103,950	$	%
Investor-supplied operating capital	$	$	5.00%
Weighted average cost of capital	7.98%	7.30%
Dollar cost of capital	$	$	14.78%
Return on invested capital (ROIC)	%	%	13.80%
Economic Value Added (EVA)	$44,061	$	%

Using the change in Water & Power’s EVA as the decision criterion, which type of investment recommendation should you make to your clients?

A hold recommendation

A sell recommendation

A buy recommendation

Which of the following statements are correct? Check all that apply.

Water & Power’s net income is growing at a rate greater than its sales. This could imply that either its revenues are growing more quickly than its expenses or that management is being effective in managing its costs while achieving the reported growth in sales. Other things remaining constant, either event should increase the value of the firm.

Water & Power’s NCF is calculated by adding its annual interest expense to the corresponding year’s net income.

An increase in the number of common shares outstanding must increase the market value of the firm’s equity.

For any given year, one way to compute Water & Power’s EVA is as the difference between its NOPAT and the product of its operating capital and its weighted average cost of capital.

Other things remaining constant, Water & Power’s EVA will increase when its ROIC exceeds its WACC.

Answer 1