For 2018, Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation)....

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Question

For 2018, Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation). The company has $20,500 of total invested capital, the weighted average cost of that capital (the WACC) was 8%, and the federal-plus-state income tax rate was 40%. What was the firm's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during 2017?

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Answer 1

Answer #1

Economic Value Added (EVA)

The Economic Value Added (EVA) is calculated by using the following formula

Economic Value Added (EVA) = EBIT(1 – Tax Rate) – [Total Invested Capital x WACC]

Earnings Before Interest & Tax (EBIT) = Sales – Total Operating Costs

= $11,500 - $5,000

= $6,500

Therefore, the Economic Value Added (EVA) = EBIT(1 – Tax Rate) – [Total Invested Capital x WACC]

= $6,500(1 – 0.40) – [$20,500 x 0.08]

= [$6,500 x 0.60] + [$20,500 x 0.08]

= $3,900 - $1,640

= $2,260

“Hence, the firm's Economic Value Added (EVA) for the year 2017 would be $2,260”