Question

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

Answer:

Hi, your question has incomplete information. However important formulas and explanations are given below.

EVA

The aim of EVA is to produce an overall financial measure that encourages senior managers to concentrate on the delivery of shareholder value.

EVA = Conventional divisional profit ± accounting adjustments - cost of capital  charge on divisional assets

Return on capital

Return on capital measures the profitability of the firm as a whole  in relation to the capital employed

Return on capital = Net Operating Profit After Tax / Invested Capital

Return on equity

Return on equity measures the Return Earned on the Owner`s Investment in the Company

Return on equity = Net Income / Total Shareholders Funds

Explanation:

Answer 2

Answer:

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

economic value added = after-tax operating income - (cost of capital x total capitalization)  = $70.80 - $32.05 = $38.75

• after-tax operating income = [(1 - tax rate) x interest expense] + net income  =  [(1 -0.35) x 12] + 63 = 70.80
• (cost of capital x total capitalization)  = 8.5% x ($121 + $256) = 32.05

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.)

return on capital = net profit before taxes / total capitalization = $97 / $377 = 25.73%

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.)

return on equity = net income / shareholders' equity = $63 / $256 = 24.61%

d. Is the company creating value for its shareholders

Yes, this company creates value for its shareholders because it is generating profits and increasing retained earnings which in turn increase stockholders' equity = more shareholders' wealth.