Question

In: Finance

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


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