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%.) Calculate the economic value added assuming its cost of capital is 10%.

Answer 1

Economic value added=$4,163.20

Step-by-step explanation:

Calculatation for the economic value added assuming its cost of capital is 10 percent

The first step is to find the After-tax operating income using this formula

After-tax operating income = (1 - tax rate) * Interest expense + Net income

Where,

Tax rate=35%

Interest expense =$830

Net income=$6,345

Let plug in the formula

After-tax operating income=(1 - .35) *$830 + $6,345

After-tax operating income=0.65*$830×$6,345

After-tax operating income= $539.50+$6,345

After-tax operating income=$6,884.50

The next step is to find the Economic value added using this formula

Economic value added= Ater-tax operating income - (Cost of capital * Total capitalization)

Where,

Ater-tax operating income =$6,884.50

Cost of capital =10%

Total capitalization=$27,213

Let plug in the formula

Economic value added=$6,884.50 - (.10 * $27,213)

Economic value added=$6,884.50-$2,721.3

Economic value added=$4,163.20

Therefore the Economic value added assuming its cost of capital is 10% will be $4,163.20