Make a rough estimate of the economic profit earned by a corporation of your choice. You will need to select a company that is publicly traded, and will need the correct spelling of the company’s name. Some examples would be Microsoft, Sun Microsystems, Disney, ExxonMobil, Ford, General Motors, etc. Go to www.morningstar.com. Choose “stocks” from the tabs at the top of the page, and then look at the top of the screen. There will be a box in which you can enter the name of the company and receive quotes and reports. Enter the name beside “quotes.” The company’s name and stock ticker symbol will come on the screen.
Find a link or tab to “Financial Statements.” The appearance changes frequently, so giving exact directions is useless. You’ll then see some charts and some tabs that look like file folders. First choose Income Statement (possibly called 10-year income). The first thing you will see is a graph and chart of net income. Find the net income for the most recent year reported. This is the accounting profit; make a note of it.
Then, find the Balance Sheet. Scroll down to the section for Shareholders (or stockholders) Equity and find stockholders equity for the most recent year (may need to look for “total equity”). Multiply this by the current interest rate to approximate the owners’ implicit costs. (You might use the prime rate or the interest rate on short term treasury bonds. For now, about 4% would be ok to use. Please do specify what interest rate you are using and where you found it.) Subtract the “owners’ implicit costs” you have just calculated from the net income figure. This will give you a rough idea of economic profit. If the figure is positive, the firm is earning economic profit. If it is negative, the firm is suffering economic loss. It if is very close to zero, the firm is earning “normal” but not “economic” profits. What is the situation for your chosen firm? Why do you think it is seeing the results it is? Some reasons might include growth of the industry (or lack thereof), general upturn or downturn in the business cycle (macroeconomic stuff), good or poor management, combinations of those