(Refer to the INSIGHTS box on pages 94-95 before attempting this problem. Notice that the calculations called for here do not involve cost of capital.) William Edwards, Inc. (WEI) had one million shares of common stock outstand- ing 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:
|
Year
|
Net Income
|
Dividends/Share
|
Shares Issued
|
Average Issue Price
|
Stock Price 12/31
|
|
20X1
|
$700,000
|
$.20
|
None
|
NA
|
$13.75
|
|
20X2
|
840,000
|
.22
|
50,000
|
$14.00
|
14.25
|
|
20X3
|
750,000
|
.24
|
100,000
|
13.50
|
13.80
|
|
20X4
|
900,000
|
.26
|
50,000
|
14.50
|
15.00
|
|
20X5
|
860,000
|
.28
|
None
|
NA
|
15.40
|
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 repre- sented a majority of the stockholders? Would the result have been different before MVA/EVA analysis?