Question

Home Depot entered fiscal 2016 with a total capitalization of $27,252 million. In 2016, debt investors received interest income of $843 million. Net income to shareholders was $6,384 million. (Assume a tax rate of 35%.) 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

Net Operating Profit after tax (NOPAT)

Net Operating Profit after tax (NOPAT) = Net Income + Interest income after tax

= $6,384 Million + [$843 Million x (1 – 0.35)]

= $6,384 Million + [$843 Million x 0.65]

= $6,384 Million + $547.95 Million

= $6,931.95 Million

Cost of capital employed

Cost of capital employed = Total capitalization x Cost of capital

= $27,252 Million x 10%

= $2,725.20 Million

Economic Value Added (EVA)

Economic Value Added (EVA) = NOPAT – Cost of capital employed

= $6,931.95 Million - $2,725.20 Million

= $4,206.75 Million

“Hence, the Economic Value Added (EVA) will be $4,206.75 Million”