Asked by duoduo Aguimarti on Jun 30, 2024
Verified
Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities totalling $400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?
A) $1 400 000
B) $1 800 000
C) $1 840 000
D) None of the given answers
Weighted Average Cost Of Capital
The average rate of return a company is expected to pay its security holders, weighted by the proportion of each finance source in the company's structure.
Economic Value Added
A measure of a company's financial performance calculated by subtracting its cost of capital from its operating profit.
Operating Income
Earnings before interest and taxes (EBIT), representing the profit from core business operations excluding non-operating income and expenses.
- Acquire knowledge on how to determine Economic Value Added (EVA) and appreciate its relevance to the performance of a corporation.
Verified Answer
CC
Caroline CapaprisJul 05, 2024
Final Answer :
C
Explanation :
First, we need to calculate the total capital of the company:
Total Capital = Assets - Current Liabilities
Total Capital = $8,000,000 - $400,000
Total Capital = $7,600,000
Next, we need to calculate the cost of capital:
Cost of Capital = Total Capital x Weighted Average Cost of Capital (WACC)
Cost of Capital = $7,600,000 x 0.10
Cost of Capital = $760,000
Finally, we can calculate the economic value added (EVA):
EVA = After Tax Operating Income - Cost of Capital
EVA = $2,600,000 - $760,000
EVA = $1,840,000
Therefore, the answer is C) $1,840,000
Total Capital = Assets - Current Liabilities
Total Capital = $8,000,000 - $400,000
Total Capital = $7,600,000
Next, we need to calculate the cost of capital:
Cost of Capital = Total Capital x Weighted Average Cost of Capital (WACC)
Cost of Capital = $7,600,000 x 0.10
Cost of Capital = $760,000
Finally, we can calculate the economic value added (EVA):
EVA = After Tax Operating Income - Cost of Capital
EVA = $2,600,000 - $760,000
EVA = $1,840,000
Therefore, the answer is C) $1,840,000
Learning Objectives
- Acquire knowledge on how to determine Economic Value Added (EVA) and appreciate its relevance to the performance of a corporation.