Question

Casey Motors recently reported the following information: Net income = $600,000. Tax rate = 40%. Interest...

Casey Motors recently reported the following information:
Net income = $600,000.
Tax rate = 40%.
Interest expense = $200,000.
Total invested capital employed = $9 million.
After-tax cost of capital = 10%.

What is the company's EVA?

-135,000

-180,000

-203,400

-216,000

-198,000
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Homework Answers

Answer #1

Step 1: Calculation of Invested Capital * WACC

WACC (after tax) = 10%

Invested Capital = $ 9,000,000

Invested Capital * WACC = 9,000,000 * (0.1) = $ 900,000

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Step 2: Calculation of NOPAT = Operating Income * (1-Tax Rate) where Tax Rate = 0.4 (or 40%)

Operating Income = Interest + Taxes + Other Income/Losses + Net Income

Thus, we reverse calculat operating inco

Net Income = Profit Before Tax * (1- Tax Rate)

$600,000 = Profit Before Tax * (1-0.4)

Which gives Profit before tax = (600,000/0.6) = 1,000,000

Operating Profit = Profit before tax + Intersts

Here - Interest expense = $200,000.

Operating Income= 1,200,000

From above formula-

NOPAT = 1,200,000 * (1-0.4) = 1,200,000 *(0.6)= $ 720,000

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Step 3 :

EVA = NOPAT - (Capital Invested * WACC)

= 720,000 - 900,000

= -180, 000

Thus, the EVA will be negative and will amount to $ 180,000.

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