Exam 13: Measuring and Managing for Shareholder Value

Pelisse Packaging Ltd. has a cost of capital of 12%. The company's balance sheet at year end shows current assets of $2.2 million, capital assets of $6.1 million, current liabilities at $1.3 million, long-term liabilities of $4.1 million, shareholders equity of $2.9 million. Its income statement for the year shows sales revenue of $5.1 million, cost of goods sold of $2.1 million, salaries of $500,000, marketing and promotions of $350,000, administration expense of $300,000, rent expense of $100,000, and depreciation of $100,000. Non-operating income and expenses included interest expense of $250,000 and new product development costs of $550,000. Income taxes amounts to $230,000. Marketing and promotions are expected to impact revenues in this year and next, and the results of the new product development for an infinite period. After performing the common adjustments to the accounts, what is the EVA for Pelisse?

When is a company is successfully increasing shareholder's wealth?

Grayson Scaffolding Inc. has a cost of capital of 9% and the following free cash flow projections over their five-year planning horizon: $3.4 million, 3.8 million, $4.5 million, $4.9 million, and $5.2 million. Using free cash flows, what is the total business value?

Free cash flows for the four-year planning horizon for Amherst Confectionery Co. Ltd. are projected to increase by $200,000 each year from a Year 1 base at $1.2 million. The company's bonds and mortgages have a market value of $2.7 million and the company's cost of capital is 8%. What is the value of Amherst Confectionery Co. Ltd to its shareholders?

Which of the following demonstrates a growth strategy for the creation of shareholder wealth?

A company has a periodic expense for depreciation of $150,000 a month. Its accumulated depreciation for the period ending December 31 of the year just ended is $18 million on capital assets of $55 million. Based on this information, what adjustment is need when calculating free cash flows?

For what reason is a higher discount rate is often used when performing Shareholder Value Analysis (SVA)?

A company currently has $6.1 million in free cash flows and expects to have $8.4 million in the last year of its 5-year plan. If its weighted cost of capital is 12%, and its tax rate is 25%, what is its terminal value?

A large company has profiled its current customer database using over 150 characteristics including size, credit rating, frequency of purchase, value of purchases, speed of payment, etc. The resulting model predicts with significant accuracy the likelihood of new customers becoming loyal customers. The company has restructured its commission system to reward sales persons who sign up customers matching the computer profile. The bonus is based on the net present value of expected future purchases less a factor for estimated length of collection period. Which measure of shareholder wealth is this performance reward system most consistent with?

What is a significant disadvantage to EVA?

Five years ago, Pandura Chemicals was incorporated issuing three million common shares at $12 each. At the company's inception, it also issued $10 million of 20-year bonds at a face value of $1000 and with a coupon rate of 8% and annual payments. Today, the company's shares trade at $22 each and bonds for a company with the same risk rating are issued at 6%. Pandura's retained earnings equal $7 million. Recalculating debt to reflect market values, what is Pandura's Market Value Added (MVA)?

Hard Drinks Ltd., a social software company, expects sales to be $20 million next year, $24 million the year after, $28 million in the following year, before settling down to $30 million thereafter. Operating profit margins are fixed at 20%. The corporate tax rate is 40%. Replacement capital asset investments will exceed depreciation by $1 million per year. Working capital will be reduced by $100,000 each year. New capital asset investment will be $500,000 each year. If Hard Drinks cost of capital is 10%, what is its total business value?

What calculations always have to be made to the value of EVA to achieve the same value as SVA?

Why may EVA be considered a better measure for rewarding managers than SVA?

The Board of Directors of Hospitality Corp. is meeting to decide on the company's fourth quarter dividend. For the first three quarters of the year dividends per share have been $0.30, $0.33, and $0.40. The company's stated policy is to provide shareholders with a total annual return of 30%. Given that the share price started the year at $25.00 and end the year at $30.00, what size dividend should the Board declare?

Which of the following is generally true about shareholder value analysis and economic value added?

What is a significant problem with using conventional accounting measures of profit, or profit-based ratios?

Lavalle Design Systems Ltd. owns computer equipment that cost $10 million. It expects to use the equipment for 10 years and sell it for $100,000. Lavalle rents everything else. Lavalle generated sales of $10 million in the year just ended and has an operating profit margin of 30%. Lavalle faces a 20% tax rate. During the year working capital was reduced by $4 million and additional equipment worth $3 million was purchased at year end. What was Lavalle's free cash flow for the year assuming straight line depreciation is used?

A company has a weighted average cost of capital of 11%, EBIT of $3.4 million, gross assets of $20.2 million, current liabilities of $6 million, and accumulated depreciation of $4 million. The company pays interest of $650,000 and has a tax rate of 34%. What is the company's Economic Value Added (EVA)?

What is the critical feedback loop to determine whether shareholder value has been created?