Question: Notice that the calculations called for here do not involve
Notice that the calculations called for here do not involve cost of capital. William Edwards, Inc. (WEI) had one million shares of common stock outstanding on 12/31/20X0. The stock had been sold for an average of $8.00 per share and had a market price of $13.25 per share on that date. WEI also had a balance of $5.0 million in its retained earnings account on that date. The following projection has been made for WEI’s next five years of operations:
Compute the MVA as of 12/31/X0, and compute EVA, the change in MVA, as a result of each subsequent year’s activity. (Assume that all shares issued during any given year received the dividends declared that year.) Comment on management’s projected performance over the five- year period. What would you do if you represented a majority of the stockholders. Would the result have been different before MVA/EVA analysis?
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