Question

Taj, your newly appointed boss, has tasked you with evaluating the following financial data for Galaxy Corp. to determine how Galaxy’s value has changed over the past year. The investment firm for which you work will make a positive (or “buy”) recommendation to its investing clients if Galaxy’s value has increased over the past year, a neutral (or “hold”) recommendation if the value has remained constant, or a negative (or “sell”) recommendation if the value has decreased. He has recommended that you use several metrics to ascertain how the firm’s value has changed, and he has provided you with the following income statement and balance sheet.

Galaxy Corp. Income Statement January 1 - December 31, Year 2
	Year 2	Year 1
Sales	$7,350,000	$7,000,000
Expenses11	5,880,000	5,740,000
EBITDA	$1,470,000	$1,260,000
Depreciation and amortization expense	257,250	245,000
EBIT	$1,212,750	$1,015,000
Interest expense	220,500	175,000
EBT	$992,250	$840,000
Tax expense (40%)	396,900	336,000
Net income	$595,350	$504,000
Common dividends	$357,210	$302,400
Addition to retained earnings	$238,140	$201,600
11Excludes depreciation and amortization

Galaxy Corp. Balance Sheet December 31, Year 2
Assets:	Year 2	Year 1
Cash and cash equivalents	$438,900	$399,000
Receivables	1,463,000	1,330,000
Inventory	2,560,250	2,327,500
Current assets	$4,462,150	$4,056,500
Net fixed assets	2,852,850	2,593,500
Total current assets	$7,315,000	$6,650,000
Liabilities and Equity:
Accounts payable	$1,097,250	$997,500
Accruals	713,213	648,375
Notes payable	1,536,150	1,396,500
Total current liabilities	$3,346,613	$3,042,375
Long-term debt	1,408,138	1,280,125
Total liabilities	$4,754,750	$4,322,500
Common stock ($1 par)	512,050	465,500
Retained earnings	2,048,200	1,862,000
Total equity	$2,560,250	$2,327,500
Total liabilities and equity	$7,315,000	$6,650,000
Shares outstanding	512,050	465,500
Weighted average cost of capital	7.98%	7.30%

To facilitate your analysis, complete the following table, and use the results to answer the related questions. (Note: Round all percentage change answers to two decimal places. If a dollar value is below $100, round your answer to two decimal places. If your answer is negative use a minus (-) sign.)

Company Growth and Performance Metrics
Metric	Year 2	Year 1	Percentage Change
	General Metrics
Sales	$7,350,000	$7,000,000	%
Net income	$595,350	$504,000	%
Net cash flow (NCF)	$	$749,000	%
Net operating working capital (NOWC)	$2,651,687	$	%
Earnings per share (EPS)	$	$1.08	%
Dividends per share (DPS)	$0.70	$	%
Book value per share (BVPS)	$	$5.00	0.00%
Cash flow per share (CFPS)	$	$	3.73%
Market price per share	$20.74	$19.75	%
MVA Calculation
Market value of equity	$	$	15.51%
Book value of equity	$2,560,250	$2,327,500	%
Market Value Added (MVA)	$	$6,866,125	%
EVA Calculation
Net operating profit after-tax (NOPAT)	$727,650	$	%
Investor-supplied operating capital	$	$	10.00%
Weighted average cost of capital	7.98%	7.30%
Dollar cost of capital	$	$	20.25%
Return on invested capital (ROIC)	%	%	8.63%
Economic Value Added (EVA)	$288,438	$	%

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

A sell recommendation

A buy recommendation

A hold recommendation

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

Galaxy’s NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year’s EBITDA.

Galaxy’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.

Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments.

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

The percentage change in Galaxy’s EVA indicates that management has increased its value.

Answer 1

COMPANY'S GROWTH AND PERFORMANCE METRICS

Please Refer The Working Note At the bottom to Understand thee figures.
	Year 2	Year 1	Percentage Change
	General Metrics
Sales	$7,350,000	$7,000,000	5%
Net income	$595,350	$504,000	18.13%
Net cash flow (NCF)	$852,600	$749,000	13.83%
Net operating Working Capital (NOWC)	$2,651,687	$2,410,625	10%
Earnings per share (EPS)	$1.16	$1.08	7.40%
Dividends per share (DPS)	$0.70	$0.65	7.70%
Book value per share (BVPS)	$5	$5.00	0.00%
Cash flow per share (CFPS)	1.67	1.61	3.73%
Market price per share	$20.74	$19.75	5.01%
MVA Calculation	(512050*20.74)	(465500*19.75)
Market value of equity	$10,619,917	$9,193,625	15.51%
Book value of equity	$2,560,250	$2,327,500	10%
Market Value Added (MVA)	$8,059,667	$6,866,125	17.38%
EVA Calculation
Net operating profit after-tax (NOPAT)	$727,650	$609,000	19.483
Investor-supplied operating capital	$5,504,537	$5,004,125	10.00%
Weighted average cost of capital	7.98%	7.30%
Dollar cost of capital	$439,212	$365,301	20.25%
Return on invested capital (ROIC)	13.22%	12.17%	8.63%
Economic Value Added (EVA)	$288,438	$243699	18.36%

Decision Analysis

EVAis Higher In year 2 therefore Buy option recommended

higher by 18.36%

Galaxy’s NCF is calculated by adding its annual depreciation and amortization expense to the corresponding year’s EBITDA.-False it is calculated by adding Interest income and Tax paid to EBITDA

Galaxy’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.False It shows marginal growth is low comparitively.

Investor-supplied operating capital is recorded as accounts payable, accruals, and short-term investments.False its (total equity+debt)-(accounts payable +accrual)

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

The percentage change in Galaxy’s EVA indicates that management has increased its value True yes EVA has Increased the value has been added.

Working Notes

ncf=Ebitda+interest+tax

nowc=current operating assets-current operating liability

eps=net income/no.of shares

dps=dividend/no.of shares

bvps=total equity/no.of shares

cfps=ncf/no.of shares

mva=market capitalisation-book value

nopat=ebit (1-tax rate)

Investor-supplied operating capital totaldebt and equity- ap-accruals

Dollar cost of capital invested supplied operating capital*wacc

Return on invested capital (ROIC) nopat/invested supplied oc

Economic Value Added (EVA) nopat-dollar cost of capital

You may ask any doubts i will clearly explain thank you.