Question

Casey Motors recently reported the following information:

Net income = $600,000.
Tax rate = 40%.
Interest expense = $200,000.
Operating capital (capital provided by investors) = $9 million.
After-tax cost of capital = 10%.
What is the company’s EVA?
a. ($300,000)
b. ($180,000)
c. $ 0
d. $200,000
e. $400,000

Answer 1

The company's EVA can be calculated as $240,000 using the given information.

Step-by-step explanation:

The company's EVA (Economic Value Added) can be calculated using the following formula:

EVA = Net Income - (Tax Rate * (Operating Capital * After-tax Cost of Capital))

Plugging in the given values, we get:

EVA = $600,000 - (0.40 * ($9 million * 0.10))

EVA = $600,000 - (0.40 * $900,000)

EVA = $600,000 - $360,000

EVA = $240,000

Therefore, the company's EVA is $240,000, so the answer is not provided in the given options. None of the options are correct.

Answer 2

The company's Economic Value Added (EVA) is b. ($180,000)

Step-by-step explanation:

To calculate a company's Economic Value Added (EVA), we need to subtract the after-tax cost of capital from the net operating profit after taxes (NOPAT). Using the given information:

Net income = $600,000

Tax rate = 40%

Interest expense = $200,000

Operating capital = $9 million

After-tax cost of capital = 10%

First, we need to calculate the NOPAT:

NOPAT = Net income + Interest expense * (1 - Tax rate)

= $600,000 + $200,000 * (1 - 0.40)

= $600,000 + $120,000

= $720,000

Next, we can calculate the EVA:

EVA = NOPAT - (Operating capital * After-tax cost of capital)

= $720,000 - ($9,000,000 * 0.10)

= $720,000 - $900,000

= -$180,000

Therefore, the company's EVA is ($180,000), which means the company's net operating profit after taxes is not sufficient to cover the after-tax cost of capital, resulting in a negative Economic Value Added.