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Compute the change in EVA for each of the cases below. ATC has an 8% cost...

Compute the change in EVA for each of the cases below. ATC has an 8% cost of capital. [Theses are separate cases, not sequential or joint changes.]

a) SG&A/Rev changes to 7%

b)Receivable Days (Days Sales Outstanding) changes to 10 days

ATC
Balance Sheet on December31 ($ millions)

	2018	2019
Inventory	20	28
Accounts Receivable	36	26
Other	29	36
Cash	410	473
Total Current Assets	495	562

NPPE	1,847	2,237
Other Fixed Assets	156	212
Total Fixed Assets	2,003	2,449

Total Assets	2,499	3,011

Short Term Debt and Notes	152	173
Accounts Payable	27	28
Other	334	412
Total Current Liabilities	514	613

Long Term Debt	1,119	1,249
Other Long Term Liabilities	175	266
Total Long Term Liabilities	1,294	1,515

Common Equity	690	884
Total Liabilities & Equity	2,499	3,011

Income Statement for Year Ending December 31 ($ millions)
	2018	2019
Total revenues	1,667	1,841
Cost of sales	1,250	1,297
Gross profit	417	544
Selling, general & admin expenses	174	180
Operating profit	243	364
Net interest expense	45	64
Other income (expense)	0	2
Income before tax	199	301
Taxes	38	69
Net Income	162	232

Solutions

Expert Solution

Given,

cost of capital=8%

a) lets consider sg&a = 7% of revenue for 2018 and 2019

Sg&a for 2018 = 117

Sg&a for 2019 = 129

recalculating the net profit figure with assumed sg&a

net income for 2018 = 217

Net income for 2019 = 284

Lets calculate total capital,

total debt = short term debt + long term debt

total debt 2018= 1271

total debt 2019=1422

equity 2018= 690

equity 2019 = 884

To calculate EVA, let’s calculate NOPAT,

NOPAT=Net income + Interest

Nopat 2018 = 45+217=262

Nopat 2019 = 64+284=348

weighted average cost of capital 2018 =8%* total capital

= 0.08*1961 = 157

weighted average cost of capital 2019 =8%* total capital

= 0.08*2306= 184

EVA=NOPAT-Weighted average cost of capital

EVA 2018= 262-157=105

EVA 2019=348-184=164

b) lets consider receivable days outstanding = 10 for 2018 and 2019

Formula to calculate receivables days outstanding (RSO) = (Receivables/revenue)*Number of days in a year

RSO for 2018 = (36/1667)*365 = 8

RSO for 2019 = (26/1841)*365= 5

Lets calculate new receivable with RSO =10,

with the help of RSO formula,

receivable for 2018= 45

receivable for 2019= 50

one can observe that, receivable for 2028 and 2019 have increased by 9 and 24 respectively hence revenue for same period will increase by same amount by assuming that receivables are part of revenue.

new revenue for 2018=1676

new revenue for 2019=1865

recalculating the net profit figure with new revenue figures

net income for 2018 = 171

Net income for 2019 = 258

Lets calculate total capital,

total debt = short term debt + long term debt

total debt 2018= 1271

total debt 2019=1422

equity 2018= 690

equity 2019 = 884

To calculate EVA, let’s calculate NOPAT,

NOPAT=Net income + Interest

Nopat 2018 = 45+171=216

Nopat 2019 = 64+258=322

weighted average cost of capital 2018 =8%* total capital

= 0.08*1961 = 157

weighted average cost of capital 2019 =8%* total capital

= 0.08*2306= 184

EVA=NOPAT-Weighted average cost of capital

EVA 2018= 216-157=59

EVA 2019=322-184=138

jeff jeffy answered 1 year ago

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