Question

Home Depot entered fiscal 2014 with a total capitalization of $27,213 million. In 2014, debt investors received interest income of $830 million. Net income to shareholders was $6,345 million. (Assume a tax rate of 35%.)

Required:
Calculate the economic value added assuming its cost of capital is 10%. (Do not round intermediate calculations.

Answer 1

$4163.20

Step-by-step explanation:

Calculation to determine the economic value added

First step is to calculate the After-tax operating income using this formula

After-tax operating income = (1 - tax rate) * interest expense + net income

Let plug in the formula

After-tax operating income =(1 - .35) *830 + 6345

After-tax operating income == 6884.50

Now let calculate the Economic value added

Using this formula

Economic value added =After-tax operating income - (cost of capital * total capitalization)

Let plug in the formula

Economic value added =6884.50 - (.10 * 27213)

Economic value added = 4163.20

Therefore the economic value added is $4163.20