Question

Home Depot entered fiscal 2017 with a total capitalization of $21,895 million.

In 2017, debt investors received interest income of $874 million. Net income to shareholders was $8,645 million. (Assume a tax rate of 21%.) Calculate the economic value added assuming its cost of capital is 10%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

Economic Value Added = Net operating income after tax (NOPAT) - ( Weighted average cost of capital * Market capitalisation))

Net operating income after tax (NOPAT) = (Net Income + Interests + Non Operating income/Losses) * ( 1 - Tax rate)

Since profit is given after tax and interest is before tax we cannot directly add the interest and we will have to calculate after tax interest.

Interest after tax = Interest * ( 1- Tax rate)

= 874 * ( 1- 0.21) = 690.46

NOPAT = Net Income + Interest net of tax

= 8645+ 690.46 = 9335.46

So, Economic Value added = 9335.46 - ( 10% * 21895)

= 9335.46 - 2189.5

Economic value added = 7145.96 Millions