Question

Company reports the following information: Current liabilities                                &

Company reports the following information:

Current liabilities                                          $40,000

Adjusted after tax operating income             $11,400

Total assets                                                    $215,000

Weighted average cost of capital (WACC)   12%

The adjusted figures reflect EVA adjustments used by Kendall & Partners. What is the EVA for Bellingham Division?

a. ($18,600)

b. ($12,840)

c. ($9,600)

d. ($6,600)

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Answer #1

Ans:

Economic Value Added (EVA) : (Return on Invested Capital - WACC) * Capital Invested

Return on Invested Capital : Operating Income / (Total Asset - Current Liability)

= $11,400 / ($215,000 - $40,000) = 6.5143%

WACC : 12%

Capital Invested : Total Asset - Current Liability : $215,000 - $40,000 = $175,000

Economic Value Added (EVA) : (6.5143% - 12%) * $175,000 = ($9,600)

So correct answer is Option C.

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