Question

For 2015, Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation). The company has $20,500 of total invested capital, the weighted average cost of that capital (the WACC) was 13%, and the federal-plus-state income tax rate was 40%.

1. What was the firm's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during 2014?

Answer 1

Management add $1,235 to shareholder's wealth during 2014

Step-by-step explanation:

EVA = NOPAT - Finance charge

Net Operating Profit After Tax(NOPAT) = Operating Income -Tax

Operating Income = $11,500 - $5,000

= $6,500

Tax = 40% x $6,500

=$2,600

NOPAT= $6,500-$2,600

=$3,900

Finance charge = (WACC x Capital Invested)

=13% x $20,500

=$2,665

EVA = $3,900 - $2,665

=$1,235

Hence, management add $1,235 to shareholder's wealth during 2014