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EVA Problem

The CEO of ABC Ltd is pleased with the company's 33% increase in sales and net income from 2018 to 2009. However, he wants to calculate economic value added (EVA) to determine if the company is truly adding or destroying economic value. The financial statements show revenues of $200M, net income of $8.448M, total assets of $175M including $50M in property, plant, and equipment and $80M in debt. The CEO tasks calculating WACC, EVA, and assessing if management is destroying wealth.

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Ashutosh Biswal
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211 views

EVA Problem

The CEO of ABC Ltd is pleased with the company's 33% increase in sales and net income from 2018 to 2009. However, he wants to calculate economic value added (EVA) to determine if the company is truly adding or destroying economic value. The financial statements show revenues of $200M, net income of $8.448M, total assets of $175M including $50M in property, plant, and equipment and $80M in debt. The CEO tasks calculating WACC, EVA, and assessing if management is destroying wealth.

Uploaded by

Ashutosh Biswal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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EVA Problem

ABC ltd , specializes in direct-to-consumer sales of high-tech gadgets. Exhibit 1 shows abbreviated financial statements
for 2018. The CEO is particularly proud of this year’s results: sales are up 33% from $15.0M in 2018, and net income is up
33% from $6.336M in 2009. However, to assess whether ABC ltd is adding or destroying economic value, he decided to
calculate EVA as well.
Exhibit 1
The financial statements ABC LTD is given below.
Income Statement for the year ended December 31, 2018 ($000s)
Net Sales 200,000
Cost of sales 100,000
R&D 30,000
Sales and Marketing 20,000
Other Expenses 20,000
Depreciation 10,000
Operating Earnings 20,000
Interest paid 7,200
Pre-tax profit 12,800
Taxes (34%) 4352
Net Income 8448

Balance Sheet as of December 31, 2010


Assets
Cash and cash equivalents 10,000
Accounts Receivable 20,000
Inventories 10,000
Property, plant and equipment-gross 50,000
Other fixed assets 85,000
Total Assets 175,000
Liabilities and Shareholders' Equity
Accounts payable 15,000
Debt 80,000
Total Liabilities 55,000
Shareholders' Equity including other equity 80,000
Total Liabilities and Shareholders' Equity 175,000

Question a: Calculate the WACC of the company


Given
1. tax rate of 34%
2. Cost of Equity is 13.64%
3. The company pays a 9% annual interest on its debt.

Question b. Calculate Economic Value Added to the company. The inputs required to compute EVA can be obtained from the
firm’s financial statements.
In spite of the significant growth in revenues and in net income, is its management team really destroying wealth?

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