Question

Casey Motors recently reported the following information: Net income = $750,000. Tax rate = 40%. Interest...

Casey Motors recently reported the following information:

Net income = $750,000.

  • 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?

a. -$30,000
b. -$35,100
c. -$29,400
d. -$32,100
e. -$34,500

rown Office Supplies recently reported $18,000 of sales, $8,250 of operating costs other than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT)?
    a. $8,033  
   b. $7,223  
   c. $7,370  
   d. $8,918  
   e. $5,749  
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Homework Answers

Answer #1

EVA is computed as shown below:

= ( [ Net income / (1 - tax rate) ] + interest expense) x (1 - tax rate) - total invested capital employed x after tax cost of capital

= ( [ $ 750,000 / (1 - 0.40) ] + $ 200,000 ) x (1 - 0.40) - $ 9,000,000 x 10%

= $ 870,000 - $ 900,000

= - $ 30,000

So, the correct answer is option a.

The EBT is computed as shown below:

= Sales - operating cost other than depreciation - depreciation - Amount of debt x interest rate

= $ 18,000 - $ 8,250 - $ 1,750 - $ 9,000 x 7%

= $ 7,370

So, the correct answer is option c.

Feel free to ask in case of any query relating to this question      

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