| Course | ACC-7020 Financial Essentials for Accountants |
|---|---|
| Module | Module 1 |
| Paper type | Module 1 written assignment: introduction to finance and value creation |
| Length | About 729 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | MBA in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 7020 Module 1
Earnings, Cash Flow and Value: A Controller's Analysis of Value Creation at a Bridgewater Packaging Company
Student Name
MBA in Accounting, Thomas Edison State University
ACC-7020: Financial Essentials for Accountants
Mentor Name
Month Day, Year
Earnings, Cash Flow and Value: A Controller's Analysis of Value Creation at a Bridgewater Packaging Company
Introduction
Ehrhardt and Brigham (2024) frame financial management around intrinsic value: expected free cash flows discounted at the weighted average cost of capital. Earnings per share, the number managers often watch, can rise while value falls, because earnings ignore the cost of the capital used to produce them. A controller's job is to measure value creation correctly and to point out where incentives push managers away from it.
Part A: From Earnings to Free Cash Flow
Free cash flow is the cash available to all investors after the company has made the investments needed to sustain its operations. Ridgeline's net investment in operating capital was $30 million: $75 million of capital spending less $60 million of depreciation, plus $15 million more working capital.
Free cash flow can be used in five ways: paying interest, repaying debt, paying dividends, repurchasing stock or buying short-term investments. Ridgeline's $97.5 million covered its after-tax interest of about $41 million on $860 million of debt, leaving the rest for shareholders, which is why the $150 million buyback described in Part D required new borrowing.
| 2024, in millions | Amount |
|---|---|
| Earnings before interest and taxes | $170.0 |
| Taxes on operating income at 25 percent | (42.5) |
| Net operating profit after taxes | 127.5 |
| Plus depreciation | 60.0 |
| Less capital expenditures | (75.0) |
| Less increase in net operating working capital | (15.0) |
| Free cash flow | $97.5 |
Part B: Return on Capital and Economic Value Added
Ridgeline's operating capital, its net operating working capital plus net fixed assets, is $1,300 million. Its weighted average cost of capital, estimated in Module 2, is about 8.52 percent.
Ridgeline creates value, but by a thin margin: its return exceeds its cost of capital by 1.3 points. Growth creates value only while that spread is positive, so expansion into products earning less than 8.52 percent would raise sales and earnings but destroy value. Biddle et al. (1997) found that EVA did not outperform earnings in explaining stock returns, which suggests treating it as a management tool for capital discipline rather than a better predictor of stock prices.
| Measure | Computation | Result |
|---|---|---|
| Return on invested capital | $127.5 / $1,300 | 9.8% |
| Capital charge | 8.52% x $1,300 | $110.8 million |
| Economic value added | $127.5 less $110.8 | $16.7 million |
| Market value added | $1,600 market value of equity less $440 book equity | $1,160 million |
Part C: Valuing the Firm
Assuming 4 percent growth forever, next year's free cash flow is $97.5 million times 1.04, or $101.4 million, and dividing by the 4.52 point spread between the cost of capital and growth gives operations worth about $2,243 million. Subtracting $860 million of debt leaves an intrinsic equity value of about $1,383 million, against a market value of $1,600 million. The market is pricing in either faster growth or a wider spread than current results support. Because the valuation is highly sensitive to the growth rate, the controller should present a range: at 3 percent growth, equity value falls to about $959 million; at 4.5 percent, it rises to about $1,674 million, slightly above the market price.
The model also shows what the market price implies. Solving for the growth rate that equates the value of operations to $2,460 million, the sum of the market value of equity and debt, gives about 4.4 percent, only slightly above the 4 percent assumed. The gap between intrinsic and market value is therefore modest and depends mainly on how fast investors expect Ridgeline to grow.
Part D: An Agency Conflict in the Bonus Plan
Ridgeline's CEO earns a bonus for growth in earnings per share. This creates the conflict Jensen and Meckling (1976) describe, in which an agent's interests diverge from the owners'. EPS can be raised by borrowing to buy back shares, by cutting research and maintenance or by investing in projects that earn more than their after-tax interest cost but less than the full cost of capital. Last year, Ridgeline deferred a $20 million equipment upgrade while repurchasing $150 million of stock, lifting EPS by 6 percent while operating capital aged.
The controller should recommend tying a meaningful part of the bonus to EVA or to return on invested capital relative to the cost of capital, measured over three years, with part paid in restricted stock that vests over time. Adding a maintenance capital floor would prevent underinvestment from flattering short-term results.
References
Biddle, G. C., Bowen, R. M., & Wallace, J. S. (1997). Does EVA beat earnings? Evidence on associations with stock returns and firm values. Journal of Accounting and Economics, 24(3), 301-336. https://doi.org/10.1016/S0165-4101(98)00010-X
Ehrhardt, M. C., & Brigham, E. F. (2024). Corporate finance: A focused approach (8th ed.). Cengage Learning.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Reading the ACC 7020 Module 1 assignment instructions
Over four modules, ACC-7020 grades four written assignments for 30 percent, with the third carrying only 3 of those points, eight forums for another 30, a Starbucks investment case for 30 and the synchronous Edison Live events for the final 10. The Module 1 assignment covers the role of financial management, value creation, financial statements and free cash flow, and agency conflicts. Expect computations of free cash flow, ROIC, EVA and MVA and discussion of the controller's role. Ridgeline's statements are composites. Some versions add a market value added comparison across competitors or ask how dividend policy affects value. Expect at least one question that asks whether growth creates value for the company in the problem.
Inside the ACC 7020 Module 1 example
The introduction defines intrinsic value and explains why earnings can mislead. Part A converts EBIT to free cash flow in a table. Part B computes ROIC, EVA and MVA and interprets the spread between return and the cost of capital, with research on EVA's usefulness. Part C values the firm with the constant growth model, compares it with the market and shows sensitivity to growth. Part D applies agency theory to an EPS-based bonus with a specific example and recommends a redesign. Every figure carries forward into the later modules, so the cost of capital and valuation here become the base for the capital structure and project questions that follow.
Reading the ACC 7020 Module 1 grading rubric
The value creation assignment is one of the three written pieces that share 27 percent of the ACC-7020 grade. Mentors check free cash flow and EVA computations, a correct valuation with the cost of capital and growth, interpretation of results against the market and analysis of agency conflicts with practical recommendations. Connecting the numbers to decisions a controller would make shows integration of theory and practice. Sensitivity analysis earns credit. Free cash flow built from operating profit, an EVA computed with the right capital base and a valuation tested for sensitivity form the quantitative core. The agency analysis should name the incentive, show its effect with an example and propose a specific change to the bonus plan.
Common ACC 7020 Module 1 mistakes, and how to avoid them
Value creation answers lose points for computing free cash flow from net income without adjustments, ignoring working capital and treating EPS growth as value creation. Start from operating profit after tax. Compare ROIC with the cost of capital before judging growth. Show how sensitive the valuation is to growth. State the growth rate and cost of capital you use and why, since small changes move the value a great deal. Compare ROIC with the cost of capital before deciding whether growth adds value. A free first sample of your own ACC-7020 Module 1 assignment is available on request.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Thomas Edison State University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
More ACC 7020 and MBA in Accounting sample papers
- ACC 7020 Module 2: Written Assignment: Bonds, Stock Valuation and the Cost of Capital
- ACC 7020 Module 3: Written Assignment: Project Cash Flows, Valuation and Risk
- ACC 7020 Module 4: Written Assignment: Exchange Rates, Hedging and a Foreign Investment
- ACC 7010 Module 1: Written Assignment: Audit Planning, Risk Assessment and Internal Control
- ACC 7000 Module 2: Written Assignment: Cost of Capital, Capital Budgeting and the Budget
- ACC 7030 Module 1: Written Assignment: IFRS Update and Convergence With U.S. GAAP
ACC 7020 Module 1 questions, answered
Where can I find a free ACC 7020 Module 1 sample paper?
The Bridgewater packaging company analysis appears above: free cash flow, ROIC, EVA and MVA, a constant growth valuation and an agency conflict in the CEO's bonus.
What is free cash flow?
Net operating profit after taxes minus net investment in operating capital: the cash available to all investors.
How is economic value added calculated?
Net operating profit after taxes minus the weighted average cost of capital times operating capital.
Why can EPS growth destroy value?
Because EPS ignores the cost of equity, so investments earning less than the full cost of capital can raise EPS while lowering value.
What is the constant growth valuation formula?
Divide next year's free cash flow by the gap between the cost of capital and the growth rate to get the value of operations.