Question

Last year Miami Rivet had $5 million in operating income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 million, and its corporate tax rate was 25%. At year-end, it had $14 million in operating current assets, $3 million in accounts payable, $1 million in accruals, $2 million in notes payable, and $15 million in net plant and equipment. Assume Miami Rivet has no excess cash. Miami Rivet uses only debt and common equity to fund its operations. (In other words, Miami Rivet has no preferred stock on its balance sheet.) Miami Rivet had no other current liabilities. Assume that Miami Rivet only noncash item was depreciation. Based on this information answer the following questions:

9)If the firm's after-tax percentage cost of capital is 9%, what is the firm's total invested capital at year-end?

10)If the firm's after-tax percentage cost of capital is 9%, what is the firm's EVA at year-end? (You should enter the full number i.e. if your calculations result in a EVA of 1 million enter 1000000.

Answer 1

9)	Firm's Total Invested Capital
	= Net Opearting Working Capital + Net Fixed Assets
	= (Current Assets - Accounts Payable - Accruals)
	+ Net Plant and Equipment
	= ($14,000,000-$3,000,000-$1,000,000) + $15,000,000
	= $10,000,000 + $15,000,000
	= $25,000,000
10)	Firm's EVA
	= Net Operating Profit After Tax (NOPAT)
	- (Invested Capital*Cost of Capital)
	= (EBIT*(1-Tax Rate)) - (Invested Capital*Cost of Capital)
	= ($5,000,000*(1-25%)) - ($25,000,000*9%)
	= ($5,000,000*0.75) - $2,250,000
	= $3,750,000 - $2,250,000
	= $1,500,000