The following table gives abbreviated balance sheets and income statements for E

Question

The following table gives abbreviated balance sheets and income statements for Estée Lauder Companies. ($ in millions) End of Year Start of Year Balance Sheet Assets Current assets: Cash and marketable securities $1,253 $1,121 Accounts receivable 946 746 Inventories 996 827 Other current assets 492 428 Total current assets 3,687 3,121 Fixed assets: Property, plant, and equipment 2,862 2,525 Less accumulated depreciation 1,719 1,501 Net fixed assets 1,143 1,024 Other long-term assets 1,444 1,191 Total assets $6,274 $5,336 Liabilities and Shareholders’ Equity Current liabilities: Debt due for repayment $ 138 $ 23 Accounts payable 1,805 1,549 Total current liabilities 1,943 1,572 Long-term debt 1,080 1,205 Other long-term liabilities 621 610 Total liabilities 3,627 3,370 Total shareholders' equity 2,629 1,948 Total liabilities and shareholders’ equity $6,274 $5,336 Income Statement Net sales $8,810 Cost of goods sold 1,937 Selling, general, and administrative expenses 5,486 Depreciation 298 Earnings before interest and taxes (EBIT) 1,089 Interest expense 64 Taxable income 1,025 Tax 322 Net income $ 703 Dividends 148 Addition to retained earnings 555 At the end of fiscal 2011 Estée Lauder had 197 million shares outstanding21 with a share price of $105. The company’s weighted-average cost of capital was about 10%. a. Calculate the market value added. (Enter your answer in millions.) Market value added $ million b. Calculate the market-to-book ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market-to-book ratio c. Calculate the economic value added. (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.) Economic value added $ million d. Calculate the return on capital. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Return on capital %

Explanation / Answer

A) Calculation of MVA MVA is the difference between the market value of capital and book value of capital Market Value of Capital Common Stock 20685 (197 Mn * $105) Book Value of Capital 2629 MVA 18056 B) EVA = (Return on Operating Capital - Weighted Average Cost of Capital ) Operating Capital         =(20.30% - 10%) * 3709         =382 Note 1 Operating Capital Shareholder's Equity 2629 Long term Debt 1080          Total Capital Less: Non operating assets 0          Operating Capital 3709 Note 2 Return on operating capital(ROOC) ROOC = Net Operating Profit After Tax(NOPAT) / Operating Capital *100 NOPAT EBIT 1098 Less: Non Operating Incomes 0 Operating EBIT 1098 Less: Economic Taxes(@31.41%) 344.88 NOPAT 753.12 ROOC = 753.12 / 3709 *100             =20.30% C) Market to Book Ratio = Market Capitalisation / Book Value of Total Equity                                        =20685/2629                                        =7.87 D) Return on Capital = 20.30%(Already Calculated)

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