Question

A firm has an EBIT of $22 million, total invested capital of $74 million, and the average cost of funds of 12%. The firm has a marginal tax rate of 35% and 4.2 million shares of the firm are outstanding. What is the EVA of the firm?

Answer 1

Find out the EVA of the firm.

To proof

As given

A firm has an EBIT of $22 million

total invested capital of $74 million,

the average cost of funds of 12%.

The firm has a marginal tax rate of 35% and 4.2 million shares of the firm are outstanding.

Formula

calculate economic value

EVA = EBIT (1-T) - [(Average cost of funds) × (Invested capital)]

12 % is written in the decimalform

`=(12)/(100)`

= 0.12

35 % is written in the decimal form

`= (35)/(100)`

=0.35

put the value in the formula

= 22× ( 1- 0.35) - [ (0.12 × 74) ]

= 22 × 0.65 - 8.88

= $5.42million

Therefore $5.42million is the EVA of the firm

Hence proved