EVA TREE ANALYSIS OF FINANCIAL STATEMENTS

| Deb Sahoo | MBA, Finance, University of Michigan | MS, EE, University of Southern California | B-Tech, EE, IIT |
($ in Millions)
Market Data
Income Taxe Rate, T
Rate of Return of a Market Index, Rm
Risk-Free Rate, Rf
Beta Coefficient
Before-Tax Cost of Debt
Percentage of Equity in Capital Structure
Percentage of Debt in Total Capital Structure

40%
12%
7%
1.10
8%
60%
40%

Sales & Variable Cost of Goods Sold

Unit sales price

Variable manufactoring cost per unit
Contribution Margin per Unit

Product Line 1
$9.00
$5.00
$4.00

Expected Unit Sales in (Millions)

Sales in $
Variable manufactoring cost
Total Contribution Margin

Product Line 2
$15.00
$8.00
$7.00

Product Line 3
$20.00
$14.00
$6.00

Product Line 4
$30.00
$10.00
$20.00

3.00

4.00

5.00

6.00

7.00

27.00

$45.00
$24.00
$21.00

$80.00
$56.00
$24.00

$150.00
$50.00
$100.00

$294.00
$120.00
$174.00

$413.00
$140.00
$273.00

$1,000.00
$400.00
$600.00

Selling Overhead
$200.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$200.00

$100.00
$100.00
$100.00
$100.00
$400.00

Fixed Assets:
Land
Building and Equipment
Accumulted Deprreciation
Total Fixed Assets

$100.00
$700.00
($200.00)
$600.00

Interest Free Liabilities:

Trade liability
Advances received
Accrual for Income Taxes
Interest Free Liabilities

$100.00
$50.00
$50.00
$200.00

Income Statement
Sales
Less Variable Cost : Cost of goods sold
Contribution Margin

Total
$182.00

2.00

Assets
Current Assets:
Cash & Cash Equivalent
Accounts Receivable
Material Inventory
Finished Good Inventory
Total Current Assets

Product Line 6
$59.00
$20.00
$39.00

$18.00
$10.00
$8.00

Fixed Overhead Expenses

Cost Center 1
Cost Center 2
Cost Center 3
Cost Center 4
Cost Center 5
Cost Center 6
Cost Center 7
Cost Center 8
Cost Center 9
Cost Center 10
Cost Center 11
Cost Center 12
Cost Center 13
Total

Product Line 5
$49.00
$20.00
$29.00

$1,000.00
$350.00
$650.00

Less Fixed Cost: Factory overhead

SG&A
Net operating income (=EBIT)

$120.00
$260.00
$270.00

Less: Interest expense

Net income before taxes

$25.60
$244.40

Less: Income taxes

Net income

$97.76
$146.64

Administration Overhead
$0.00
$100.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$100.00

Factory Overhead
$0.00
$0.00
$100.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$100.00

Total
$200.00
$100.00
$100.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$400.00

COST OF CAPITAL TREE

Rate of Return of a Market Index

12.00%
Market Risk Premium
5.00%
Company Risk Premium
5.50%
Cost of equity
13.00%
Weighted Cost of Equity
7.80%

Risk-Free Rate
7.00%

x
Beta Coefficient
1.10

+
Risk-Free Rate
7.00%

x
Percentage of Equity in Capital Structure
60.00%

WACC
9.72%

Before-Tax Cost of Debt

8.00%

+
After-Tax Cost of Debt
4.80%
Weighted Cost of Debt
1.92%

Before-Tax Operating Profit in %

100.00%

x
After-Tax Operating Profit in %
60.00%

% of Total Capital Supplied by Debt

40.00%

Income Taxe Rate

40.00%

EVA VALUE DRIVER TREE

Sales
$1,000.00
Contribution
$650.00

Before interest

EBIT
$270.00
NOPAT
$162.00
Profit Margin
16.2%
RONA
20.3%
Operating Profit
$162.00
EVA
$84.24

Net Assets
$800.00

Cost of Capital
$77.76

Sales
$1,000.00
Total Net Asset Turnover
1.25

Overhead (Fixed Cost)

$380.00
(1-Rate of Income Tax)
0.6

Assets
$1,000.00

:
Net Assets
$800.00

WACC
9.7%

Fixed Assets
$600.00
+

Interest Free Liabilities

$200.00

Variable Cost of Goods Sold

$350.00

Current Assets
$400.00

EVA-Chart
25.00%

20.00%

RONA 20.25 %

Operating Profit = $162

WACC/RONA

Operating Profit - Cost of Capital = EVA = $84.24

15.00%

10.00%

WACC 9.72 %

Cost of Capital= $77.76

5.00%

0.00%
$0.00

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

Net Assets
Operating Profit

Cost of Capital

$700.00

$800.00

$900.00