EVA NOPAT and EVA Capital: Operating Approach You are provided with the following finan- cial statement information from Astro, Inc. for its most recent fiscal year.
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Statement of Financial Position (Balance Sheet) End of Year (000s)
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Assets
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Cash
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$ 35
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Net Accounts Receivable (A/R)
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190
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Inventory
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190
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Other current assets
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95
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Total current assets
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$ 510
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Property, plant, and equipment (net)
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605
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Other long-term assets
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120
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Total assets
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$1,235
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Liabilities and Stockholders' Equity
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Short-term debt (@10%)
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$ 100
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Accounts payable
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150
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Income taxes payable
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20
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Other current liabilities
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200
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Total current liabilities
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$ 470
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Long-term debt (8%)
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150
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Other long-term liabilities
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120
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Total liabilities
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$ 740
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Deferred income taxes
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70
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Common equity
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425
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Total liabilities and shareholders' equity
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$1,235
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The statement of income for the company for the year just ended is as follows:
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Statement of Income Most Recent Year (000s)
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Net sales
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$2,000
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Cost of goods sold (CGS)
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1,670
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Gross margin
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330
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Less: SG&A costs
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185
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Depreciation
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35
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Other operating expenses
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50
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Total expenses
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270
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Net operating profit
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60
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Less: Interest expense
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22
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Plus: Other income
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12
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Income before tax
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50
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Less: Income tax (@ 40%)
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20
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Net profit after tax
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$ 3
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Assume a weighted-average cost of capital (WACC) of 10.7% and an income tax rate of 40%.
Required
1. Prepare, using the operating approach, an estimate of EVA NOPAT. In addition to the above data, you discovered the following: increase during the year of the LIFO reserve, $2; imputed interest expense on noncapitalized leases, $4; and increase in deferred tax liability during the year, $5. (Hint: The cor- rect answer is $53; the amount of cash taxes paid on operating profit during the year is $25.) What is the rationale for the various adjustments you made to the company's reported income statement?
2. Prepare, using the operating approach, an estimate of EVA capital. (Hint: The correct answer is $925.) In addition to the above information, you note the following: end-of-year value of the LIFO reserve, $10; and present value of noncapitalized leases, $50. What is the rationale for the adjustments you made to reported balance sheet amounts in order to estimate EVA capital?
3. Given the company's WACC, what is the estimated EVA for the year? How do you interpret this figure?