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Finc 421 week 6
Name
Instructor
Subject
April 15, 2022
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Finc 421 week 6
1. Discuss the difference between NOPAT and net income and explain which one is the better
measure of a company's performance, and why?
Net Operating Profit after Tax (NOPAT), also known as net operating profit after deduction
of taxes, is the operating profit of an organization after the deduction of taxes. A profit and loss
statement is a tool used to determine its profitability. When there is no debt funding, it aids the
firms in calculating their profits. In the event of NOPAT, the corporation is unable to claim a tax
deduction for interest paid on loan financing. It may also be computed using the following formula:
NOPAT = Operating Profit (1 – tax rate) + Net Operating Profit
Net Income is defined as the number of net profits (positive amount) that remains after subtracting
all costs, interest, taxes, and preferred stock dividend from Gross Profit. It is referred to as the
bottom line or the net growth in the shareholder's equity in certain circles. In addition to
transferring a portion of net Income to Reserves & Surplus, the remaining net Income is dispersed
to the company's owners.
The opposite is true if the amount remaining after subtracting the costs mentioned above is
negative, in which case it will be referred to as a Net Loss.
The distinction between NOPAT and Net Income may be easily distinguished based on the
following factors:
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NOPAT is used to compare the performance of several companies, while net income is used to
evaluate the success of a single business.
It is not feasible to claim a tax deduction for interest in the case of NOPAT, although the interest
deduction is accessible in the case of Net Income.
NOPAT is the amount left over after subtracting taxes from operating profit. On the other hand,
Net Income is the amount left over after all costs, gains, taxes, and dividends have been deducted
(S, 2018).
Calculate the Economic Value Added for the company that you selected for the Company
Analysis Project and critically evaluate the result?
A company's financial performance is measured by removing its cost of capital from its
operating profit and then correcting for taxes on an after-tax basis, which is known as economic
value added (EVA) (Ramana, 2005).
EVA is the difference between a company's cost of capital and its rate of return (RoR). It is used
to quantify the value that a firm creates from cash investment. Having a negative EVA indicates
that the firm is not creating value from its money. On the other hand, EVA suggests that a firm
generates value for the money invested in it.
EVA is calculated using the following formula:
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EVA = NOPAT - (Capital Invested * WACC)
Non-operating profit after taxation (NOPAT)
Debt plus capital leases plus stockholders' equity equals invested capital.
WACC stands for "Weighted Average Capital Cost."
EVA calculations for Apple.
12 months ended:
Sep 25, 2021 Sep 26, 2020 Sep 28, 2019 Sep 29, 2018 Sep 30,
2017 Sep 24, 2016
Net operating profit after taxes (NOPAT)1 91,417
52,072
Cost of capital2
58,457
53,325
25,136
46,539
15.24%
15.09%
14.71%
14.47%
14.24%
46,064
39,606
54,225
30,068
51,146
84,397
52,479
45,349
20,784
44,789
14.08%
Invested capital3
40,704
Economic profit4
40,807
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Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 91,417 – 15.24% × 46,064 = 84,397
Should the company that you selected for the Company Analysis Project borrow more money
because of the tax benefit from interest payments? Why or why not (use actual financial
data to support the analysis)?
The company I selected for analysis is Apple.
Yes Apple borrow more money because the interest rate on Apple's new loan is so cheap, it comes
to Apple's $2.5 billion in five-year notes, which bear a lower after-tax interest expense for Apple
than the after-tax cost of the cash dividend that it pays its ordinary shareholders.
That's because Apple doesn't want to pay the 35 percent corporation taxes necessary to bring it
back to the United States. On the other hand, Apple plans to borrow in the United States to meet
its $30 billion in dividends and stock buybacks.
According to Credit Sights, Apple owes $8 billion in debt due in 2020, with the majority of that
debt coming from the United States and Japan. A financing fee is the amount of money you'll have
to pay in order to take out a loan. Simple interest is the most common kind of interest charged by
lenders. The basic interest formula is: principle x rate x time Equals interest.
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4. Most Important Things Learned – What are the most important things you learned from
the study of this week's readings, discussions, and assignments?
This week's discussion and assessment have taught me a great deal, such as the difference
between NOPAT and net income and how they are calculated. I understand Economic Value
Added (EVA) and how to calculate EVA for businesses. I also learn about the tax advantages and
available interest payments.
References
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1. Ramana, D. V. (2005). Market Value Added and Economic Value Added: Some Empirical
Evidences. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.871404
2. S, S. (2018, 26 juli). Difference Between NOPAT and Net Income (with Comparison
Chart).
Key
Differences.
Geraadpleegd
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25
april
https://keydifferences.com/difference-between-nopat-and-net-income.html
2022,
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