50.1K

Verified Solution

Link Copied!

Josh, your newly appointed boss, has tasked you with evaluating the following financial data for Galaxy Corp. to determine how Galaxy's value has changed over the past year. The investment firm for which you work will make a positive (or "buy") recommendation to its investing clients if Galaxy's value has increased over the past year, a neutral (or "hold") recommendation if the value has remained constant, or a negative (or "sell") recommendation if the value has decreased. He has recommended that you use several metrics to ascertain how the firm's value has changed, and he has provided you with the following income statement and balance sheet. Galaxy Corp. Balance Sheet December 31, Year 2 Year 2 Assets: Year 1 Galaxy Corp. Income Statement January 1 - December 31, Year 2 Year 2 Sales $8,137,500 Expenses 1 6,510,000 EBITDA 1,627,500 Depreciation and amortization expense 284,813 EBIT 1,342,687 Interest expense 244,125 EBT 1,098,562 Tax expense (40%) 439,425 Net income $659,137 Year 1 $7,750,000 6,355,000 1,395,000 271,250 1,123,750 193,750 930,000 372,000 $558,000 $530,100 1,767,000 3,092,250 5,389,350 3,445,650 $8,835,000 $441,750 1,472,500 2,576,875 4,491,125 2,871,375 $7,362,500 Cash and cash equivalents Receivables Inventory Current assets Net fixed assets Total assets Liabilities and Equity: Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity Total debt and equity Common dividends Addition to retained earnings $395,482 $263,655 $334,800 $223,200 $1,325,250 861,413 1,855,350 4,042,013 1,700,738 5,742,750 618,450 2,473,800 3,092,250 $8,835,000 $1,104,375 717,844 1,546,125 3,368,344 1,417,281 4,785,625 515,375 2,061,500 2,576,875 $7,362,500 1 Excludes depreciation and amortization Shares outstanding Weighted average cost of capital 618,450 7.98% 515,375 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to two decimal places. Company Growth and Performance Metrics Percentage change Using the change in Galaxy's EVA as the decision criterion, which type of investment recommendation should you make to your clients? Metric Year 1 Year 2 General Metrics $8,137,500 $659,137 $7,750,000 $558,000 $829,250 O A sell recommendation O A buy recommendation O A hold recommendation $3,202,687 | Which of the following statements are correct? Check all that apply. Sales Net income Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) Cash flow per share (CFPS) Market price per share $1.08 $0.64 $5.00 0.00% -4.97% $19.75 $20.74 MVA Calculation 26.02% Market value of equity Book value of equity Market Value Added (MVA) $3,092,250 $2,576,875 $7,601,781 The percentage change in Galaxy's EVA indicates that management has increased its value. The percentage change in Galaxy's MVA indicates that its management has increased the firm's value. O An increase in the number of common shares outstanding must increase the market value of the firm's equity. Galaxy's NCF is calculated by adding its annual interest expense to the corresponding year's net income. For any given year, one way to compute Galaxy's EVA is as the difference between its NOPAT (such as $674,250) and the product of its operating capital ($5,540,281) and its weighted average cost of capital ($7.30). EVA Calculation $805,612 20.00% 7.98% 7.30% Net operating profit after-tax (NOPAT) Investor-supplied operating capital Weighted average cost of capital Dollar cost of capital Return on invested capital (ROIC) Economic Value Added (EVA) 31.18% -0.41% $275,241 Josh, your newly appointed boss, has tasked you with evaluating the following financial data for Galaxy Corp. to determine how Galaxy's value has changed over the past year. The investment firm for which you work will make a positive (or "buy") recommendation to its investing clients if Galaxy's value has increased over the past year, a neutral (or "hold") recommendation if the value has remained constant, or a negative (or "sell") recommendation if the value has decreased. He has recommended that you use several metrics to ascertain how the firm's value has changed, and he has provided you with the following income statement and balance sheet. Galaxy Corp. Balance Sheet December 31, Year 2 Year 2 Assets: Year 1 Galaxy Corp. Income Statement January 1 - December 31, Year 2 Year 2 Sales $8,137,500 Expenses 1 6,510,000 EBITDA 1,627,500 Depreciation and amortization expense 284,813 EBIT 1,342,687 Interest expense 244,125 EBT 1,098,562 Tax expense (40%) 439,425 Net income $659,137 Year 1 $7,750,000 6,355,000 1,395,000 271,250 1,123,750 193,750 930,000 372,000 $558,000 $530,100 1,767,000 3,092,250 5,389,350 3,445,650 $8,835,000 $441,750 1,472,500 2,576,875 4,491,125 2,871,375 $7,362,500 Cash and cash equivalents Receivables Inventory Current assets Net fixed assets Total assets Liabilities and Equity: Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock ($1 par) Retained earnings Total equity Total debt and equity Common dividends Addition to retained earnings $395,482 $263,655 $334,800 $223,200 $1,325,250 861,413 1,855,350 4,042,013 1,700,738 5,742,750 618,450 2,473,800 3,092,250 $8,835,000 $1,104,375 717,844 1,546,125 3,368,344 1,417,281 4,785,625 515,375 2,061,500 2,576,875 $7,362,500 1 Excludes depreciation and amortization Shares outstanding Weighted average cost of capital 618,450 7.98% 515,375 7.30% To facilitate your analysis, complete the following table, and use the results to answer the related questions. Round your percentage change answers to two decimal places. Company Growth and Performance Metrics Percentage change Using the change in Galaxy's EVA as the decision criterion, which type of investment recommendation should you make to your clients? Metric Year 1 Year 2 General Metrics $8,137,500 $659,137 $7,750,000 $558,000 $829,250 O A sell recommendation O A buy recommendation O A hold recommendation $3,202,687 | Which of the following statements are correct? Check all that apply. Sales Net income Net cash flow (NCF) Net operating working capital (NOWC) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) Cash flow per share (CFPS) Market price per share $1.08 $0.64 $5.00 0.00% -4.97% $19.75 $20.74 MVA Calculation 26.02% Market value of equity Book value of equity Market Value Added (MVA) $3,092,250 $2,576,875 $7,601,781 The percentage change in Galaxy's EVA indicates that management has increased its value. The percentage change in Galaxy's MVA indicates that its management has increased the firm's value. O An increase in the number of common shares outstanding must increase the market value of the firm's equity. Galaxy's NCF is calculated by adding its annual interest expense to the corresponding year's net income. For any given year, one way to compute Galaxy's EVA is as the difference between its NOPAT (such as $674,250) and the product of its operating capital ($5,540,281) and its weighted average cost of capital ($7.30). EVA Calculation $805,612 20.00% 7.98% 7.30% Net operating profit after-tax (NOPAT) Investor-supplied operating capital Weighted average cost of capital Dollar cost of capital Return on invested capital (ROIC) Economic Value Added (EVA) 31.18% -0.41% $275,241

Answer & Explanation Solved by verified expert

See Answer