Chapter 3, Problem 7P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# EVA Barton Industries has operating income for the year of $3,500,000 and a 36% tax rate. Its total invested capital is$20,000,000 and its after-tax percentage cost of capital is 8%. What is the firm’s KVA?

Summary Introduction

To compute: The economic value added for Company B.

Introduction:

It is a measure along with the market value added, to evaluate the management’s performance. It considers the opportunity costs of capital invested in the business and the net operating profit generated by the business.

Explanation

Given,

Net operating income is $3,500,000. Income tax rate is 36% or 0.36. Total invested capital$20,000,000.

After tax percentage cost of capital is 8% or 0.08.

Formula to compute economic value added,

EconomicĀ ValueĀ Added=[OperatingĀ Income(1āTaxĀ Rate)āInvestedĀ CapitalĆAfterĀ TaxĀ PercentageĀ CostĀ ofĀ Capital]

Substitute $3,500,000 for operating income, 0.36 for tax rate,$20,000,000 for invested capital and 0.08 for after tax percentage cost of capital.

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