Question

Here are simplified financial statements for Watervan Corporation:

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	887.00
Cost of goods sold		747.00
Depreciation		37.00
Earnings before interest and taxes (EBIT)	$	103.00
Interest expense		18.00
Income before tax	$	85.00
Taxes		17.85
Net income	$	67.15

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Current assets	$	375			$	324
Long-term assets		270				228
Total assets	$	645			$	552
Liabilities and shareholders’ equity
Current liabilities	$	200			$	163
Long-term debt		114				127
Shareholders’ equity		331				262
Total liabilities and shareholders’ equity	$	645			$	552

The company’s cost of capital is 8.5%.

a. Calculate Watervan’s economic value added (EVA). (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

b. What is the company’s return on capital? (Use start-of-year rather than average capital.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. What is its return on equity? (Use start-of-year rather than average equity.) (Enter your answer as a percent rounded to 2 decimal places.)

d. Is the company creating value for its shareholders?

Answer 1

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