Question

Endotrope Corporation has an after-tax operating income of $3,200,000 and a 9% weighted-average cost of capital. Assets total $7,000,000 and current liabilities total $1,800,000. On the basis of this information, Endotrope's economic value added is: ___________.

A. $2,408,000.
B. $2,732,000.
C. $3,668,000
D. $3,992,000.
E. None of the answers is correct.

Answer 1

B. $2,732,000.

Step-by-step explanation:

After-tax operating income (ATI) = $3,200,000

Weighted-average cost of capital (WA) = 9%

Assets (A) = $7,000,000

Liabilities (L) = $1,800,000

Economic value added (EVA) is given by:

`EVA = ATI -[(A-L)*WA]\\EVA = \$3,200,000 - [(\$7,000,000-\$1,800,000)*0.09]\\EVA = \$2,732,000`

Endotrope's economic value added is $2,732,000