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Financial Statements - Investor and Management Views

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Compare and contrast the differing views an investor and management may have on financial statements. How should investors and management view EVA and FCF? Pick a publically traded company. Go to the company Web site. Try one that you are familiar with?you shop at their store, eat at their restaurants, or wear their clothes. On their Web site, try to find their annual financial report. If you cannot find it on their site do an Internet search. Sometimes these are found under Investor Relations on a company's site. Yahoo finance is also a good source. If you still cannot find the annual report, try another search until you find one (for example, search for "GAP Annual Report"). Search for the economic profit, EVA, and free cash flow in the firm's annual report, and discuss your findings. Discuss the firm's operations as indicated by their annual report. You must submit your backup in Excel or other supporting documentation showing how answers were reached.

EVA=EBIT (1-T)- (Total investors capital x after-tax cost of capital)
Free Cash Flow = EBIT(1-T) + Depreciation - (Capital Expenditures+ Increase in Net Working Capital)

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Solution Summary

The expert compares the views an investor and management may have on financial statements. How investors and management view EVA and FCF is determined.

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Economic Value Added vs. Free Cash Flows

Admittedly, there are different users of the financial statements. These users also have different reasons in analyzing the statements. For example, investors would analyze them to determine whether their investments in the firm should be retained, sold or even added to. This implies then that users of financial statements have also differing views on major financial metrics such as the economic value added and free cash flows.

To be more specific, management views EVA as a capital budgeting decision making tool. Using EVA allows management to identify the economic profit of an investment. Unlike net income, EVA takes into account the opportunity cost of capital. The ...

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