Answer:
a. Calculate Watervan’s economic value added (EVA). (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
economic value added = after-tax operating income - (cost of capital x total capitalization) = $70.80 - $32.05 = $38.75
- after-tax operating income = [(1 - tax rate) x interest expense] + net income = [(1 -0.35) x 12] + 63 = 70.80
- (cost of capital x total capitalization) = 8.5% x ($121 + $256) = 32.05
b. What is the company’s return on capital? (Use start-of-year rather than average capital.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
return on capital = net profit before taxes / total capitalization = $97 / $377 = 25.73%
c. What is its return on equity? (Use start-of-year rather than average equity.) (Enter your answer as a percent rounded to 2 decimal places.)
return on equity = net income / shareholders' equity = $63 / $256 = 24.61%
d. Is the company creating value for its shareholders
Yes, this company creates value for its shareholders because it is generating profits and increasing retained earnings which in turn increase stockholders' equity = more shareholders' wealth.