Question

Which of the following statements always apply to corporations?  (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

Unlimited liabilityunchecked

Limited lifeunchecked

Ownership can be transferred without affecting operationsunchecked

Managers can be fired with no effect on ownership

Which of the following are correct descriptions of large corporations? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

• Managers no longer have the incentive to act in their own interests.unanswered
• The corporation survives even if managers are dismissed.unanswered
• Shareholders can sell their holdings without disrupting the business.unanswered
• Corporations, unlike sole proprietorships, do not pay tax; instead, shareholders are taxed on any dividends they receive.

Which of the following statements more accurately describes the treasurer than the controller? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

• Monitors capital expenditures to make sure that they are not misappropriatedunanswered
• Responsible for investing the firm’s spare cashunanswered
• Responsible for arranging any issue of common stockunanswered
• Responsible for the company’s tax affairs

Here is a simplified balance sheet for Locust Farming:

Locust Farming
Balance Sheet
($ in millions)
Current assets	$	42,534		Current liabilities	$	29,745
Long-term assets		46,852		Long-term debt		27,762
				Other liabilities		14,337
				Equity		17,542
Total	$	89,386		Total	$	89,386

Locust has 667 million shares outstanding with a market price of $93 a share.

a. Calculate the company’s market value added. (Enter your answers in millions.)

b. Calculate the market-to-book ratio. (Round your answer to 2 decimal places.)

c. How much value as the company created for its shareholders as a percent of shareholders’ equity, that is, the net capital contributed to the firm by its shareholders? (Enter your answer as a percentage rounded to the nearest whole number.)

Home Depot entered fiscal 2017 with a total capitalization of $21,907 million. In 2017, debt investors received interest income of $878 million. Net income to shareholders was $8,657 million. (Assume a tax rate of 21%.)

Calculate the economic value added assuming its cost of capital is 10%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

1). Statements which always apply to corporations:

- Ownership can be transferred without affecting operations.

- Managers can be fired with no effect on ownership.

2). Correct description of large corporations:

- The corporation survives even if the managers are dismissed.

- Shareholders can sell their holdings without disrupting the business.

3). Statements which more accurately describe the treasurer than the controller:

- responsible for investing the firm's spare cash

- responsible for arranging any issue of common stock

4a). Market value = number of shares*price per share = 667*93 = 62,031 million

Market value added = market value - book value of equity

= 62,031 - 17,542 = 44,489 million

b). Market to book ratio = market value/book value of equity = 62,031/17,542 = 3.54

c). Value created by the company as a percent of shareholder's equity = market value/book value*100

= 62,031/17,542*100 = 354%

5). EVA = NOPAT - dollar cost of capital

NOPAT = EBIT*(1-Tax rate)

EBIT calculation:

EBT (Earnings before tax) = Net income/(1-Tax rate) = 8,657/(1-21%) = 10,958.23 million

EBIT = EBT + Interest expense = 10,958.23 + 878 = 11,836.23 million

NOPAT = 11,836.23*(1-21%) = 9,350.62 million

Dollar cost of capital = WACC*Total capital = 10%*21,907 = 2,190.70 million

EVA = 9,350.62 - 2,190.70 = 7,159.92 million