V193w Aplia: Student Question tps//coursesa aSmarterMail New Tab 1536064597884 0
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V193w Aplia: Student Question tps//coursesa aSmarterMail New Tab 1536064597884 0AAA68040165062403... Periodontist Garland Dentalintelligence 10. Value added to a firm Financial statements refect only the book values of the data that analysts use to evaluate a company's performance To incorporate market values, two additional performance measures were developed-market value added (MVA) and economic value added (EVA). The EVA metric effectively measures the amount of shareholder wealth that the firm's management has during a specific period of time. A EVA value indicates that the firm's managers have reduced the firm's value, and shareholders might have earned more value by investing in some other investment with the same risk level. Which performance measure evaluates the amount by which profits exceed or fall short of the cost of capital in any one period? O Market value added O Economic value added Consider the following case: Last year, Jackson Tires reported net sales of $80 million and total operating costs (including depreciation) of $5:2 million. It had $115 million of investor-supplied capital, with an after-tax cost of 12.5%. If the company's tax rate is 40%, how much value did its management create or lose for Jackson Tire during the year? O $2.425 million O $54.625 million O $0.667 million $33.625 million EVA calculates the value added to a firm in a given year. Does that mean that a firm's MVA is the sum of all the EVAs generated by the firm during its life? (Note: Sterm Stewart copyrighted the terms MVA and EVA. Other firms use different terms for these concepts, but MVA and EVA are most commonly used in practice.) Yes No 59:26 7-38 AM 9/4/2018Explanation / Answer
Question - 1
The EVA metric effectively measures the amount of shareholder wealth that the firm's management has added to the firm's value during a time period. A negative EVA value indicates that management have reduced the firm's value.
Question - 2 .......... Economic value added.
Question - 3 .......... Option - A 2.425 Million
Accounting profit = ( 80 - 52) ( 1 - 0.40 ) = 16.80 million
Cost of capital = 115 * 0.125 = 14.375
Economic value added = Accounting profit - Cost of capital = 16.80 - 14.375 = 2.425 million
Question - 4 ........ NO
Because, MVA is based on future expected EVA discounted to get the present value. So direct addition of EVA does not mean MVA.
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