Question

For 2015, 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 13%, 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 2014?

Answer 1

The firm's Economic Value Added (EVA) is $1,235

Step-by-step explanation:

The formula to compute EVA is shown below:

= Net operating income or earnings after taxes - (invested capital × cost of capital)

where,

Net operating income after taxes = (Sales - operating cost) × ( 1 - tax rate)

= ($11,500 - $5,000) × (1 - 40%)

= $6,500 × 0.60

= $3,900

The other items values would remain the same

Now put these values to the above formula

So, the value would equal to

= $3,900 - ($20,500 × 13%)

= $3,900 - $2,665

= $1,235