HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investorsupplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federalplusstate income tax rate was 25%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?
a. 
$2,441.25 

b. 
$2,208.75 

c. 
$2,563.31 

d. 
$2,098.31 

e. 
$2,325.00 
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and yearend assets of $195,000. The debttototalassets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 25%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?
a. 
2.48% 

b. 
3.06% 

c. 
3.40% 

d. 
3.74% 

e. 
2.76% 
Answer : 1) Correct option is (e.) 2325.00
Calculation of HHH's Economic Value Added (EVA)
EVA = [EBIT * (1  Tax rate]  [Investorsupplied operating assets (or capital) * WACC]
EBIT = Sales  Operating Cost
= 12500  7025
= 5475
EVA = [5475 * (1  0.25)]  [18750* 9.5%]
= 4106.25  1781.25
= 2325
Answer : 2) Correct Option is (c.) 3.40%
Calculations :
Proportion of Debt and Equity under Current ROE structure and Proposed ROE structure :
Under Current Structure
Asset = 195000
Debt = 195000 * 27% = 52650
Equity = 195000  52650 = 142350
Under Proposed Structure Structure
Asset = 195000
Debt = 195000 * 45% = 87750
Equity = 195000  87750 = 107250
Current ROE  Proposed ROE  
Sales  303225  303225 
Less : Operating Cost  267500  267500 
Earning Before Interst and Taxes  35725  35725 
Less : Interest  4317.3(52650 * 8.2%)  7195.5(87750 * 8.2%) 
Earning Before Taxes  31407.7  28529.5 
Less : Taxes@25%  7851.925  7132.375 
Earning for Equity shareholder  23555.775  21397.125 
Divided by Equity  142350  107250 
ROE  16.55%  19.95% 
Change in ROE = 19.95%  16.55%
= 3.40%
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