Question

Falconer Company had net (after-tax) income last year of $14,107,956 and total capital employed of $131,869,720. Falconer's actual cost of capital was 12%.

Required:
1. Calculate the EVA for Falconer Company. Enter negative values as negative numbers, if required. Round your answer to the nearest dollar. $
2. Conceptual Connection: Is Falconer creating or destroying wealth?

Answer 1

1. -$1,716,410.40

2. destroying wealth

Step-by-step explanation:

The formula to compute EVA is shown below:

1. = Net operating income or earnings after taxes - (total capital employed × actual cost of capital)

= $14,107,956 - ($131,869,720 × 12%)

= $14,107,956 - $15,824,366.40

= -$1,716,410.40

2. As we see that the amount comes in negative that represent the wealth is destroyed