For 2018, Gourmet Kitchen Products reported $22.5 million of sales and $18 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10% and its federal-plus-state income tax rate was 35%. What was the firm's economic value added (EVA), that is, how much value did management add to stockholders' wealth during 2018? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest dollar, if necessary.

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Asked Sep 15, 2019
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For 2018, Gourmet Kitchen Products reported $22.5 million of sales and $18 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10% and its federal-plus-state income tax rate was 35%. What was the firm's economic value added (EVA), that is, how much value did management add to stockholders' wealth during 2018? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest dollar, if necessary.

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Expert Answer

Step 1

Economic value added (EVA) is a measure of a company's economic profit. It is the value created above the required return of shareholders of a company.

Step 2
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Economic value added (EVA) Net operating profit after taxes - (Invested capital) x (Cost of capital) Net operating profit after taxes= (Sales-Operating cost) x (1-tax rate) X

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Step 3
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Economic value added-[(22.5x1000000-18x1000000)x (1-35%)]- (15x1000000x 10%) -[(22500000-18000000)x(1-35%)](15000000x10% =[4500000x0.65]-1500000 -2925000-1500000 =1425000

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