In: Finance
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 |
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