Question

Avoinics Industrials reported at year end that operating income before taxes for the year equaled $2,400,000. The firm's weighted-average cost of capital (WACC) is 7.24%. The carrying amount of debt is $1,300,000, and the carrying amount of equity capital is $8,800,000. The income tax rate for Avionics is 30%. Assuming that there are no 'accounting distortions' to be adjusted, what is the economic value added (EVA)? Group of answer choices

Answer 1

$948,760

Step-by-step explanation:

The computation of the economic value added (EVA) is shown below:

= Operating income after taxes - carrying amount of debt and equity after considering the firm's weighted-average cost of capital

where,

Operating income after taxes equal to

= $2,400,000 × (1 -30%)

= $1,680,000

Cost of debt and equity is

= ($1,300,000 + $8,800,000) × 7.24%

= $731,240

So, the economic value added is

= $1,680,000 - $731,240

= $948,760