Question

He following information relates to Houston, Inc: od out of

Total assets $9,000,000
After-tax operating income 1,500,000
Current liabilities 800,000

If the company has a 10% weighted average cost of capital its economic value added would be:

a. $200,000
b. $530,000
c. $5680,000
d. $970,000
e some other amount.

Answer 1

To calculate Economic Value Added (EVA) for Houston, Inc., subtract 10% of Capital Invested, which is total assets minus current liabilities, from the NOPAT. The correct EVA is $680,000, which is not listed among the provided options.

Step-by-step explanation:

The student is asking about calculating Economic Value Added (EVA) for a company given its total assets, after-tax operating income, current liabilities, and its weighted average cost of capital (WACC). To calculate the EVA, we use the formula: EVA = NOPAT - (WACC × Capital Invested), where NOPAT is net operating profit after taxes, and Capital Invested is total assets minus current liabilities.

Using Houston, Inc.'s figures:

• Total Assets: $9,000,000
• After-tax Operating Income (NOPAT): $1,500,000
• Current Liabilities: $800,000
• WACC: 10%

Therefore, EVA can be calculated as:

1. Capital Invested = Total Assets - Current Liabilities = $9,000,000 - $800,000 = $8,200,000
2. EVA = NOPAT - (WACC × Capital Invested) = $1,500,000 - (0.10 × $8,200,000) = $1,500,000 - $820,000 = $680,000

The correct answer to the student's question would be some other amount not listed among the options given.