Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
EVA For 2015, Everyday Electronics 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 9%, 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 2015?
To compute: The economic value added for Company E.
Economic Value Added (EVA): It is a measure along with market value added, to evaluate management’s performance. It considers the opportunity costs of capital invested in the business and the net operating profit generated by the business.
Determine the economic value added
Given,
Net operating income is $4.5 million (working note).
Income tax rate is 35%
Total invested capital $15 million.
After tax percentage cost of capital is 9%.
Formula to compute economic value added,
Substitute $4.5 million for operating income, 35% for tax rate, $15 million for invested capital and 9% for after tax percentage cost of capital
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