Question

For 2019, Gourmet Kitchen Products reported $21 million of sales and $17 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10% and its federal-plus-state income tax rate was 25%. What was the firm's economic value added (EVA), that is, how much value did management add to stockholders' wealth during 2019? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest dollar, if necessary.

Answer 1

$1,200,000

Step-by-step explanation:

Calculation for how much value that the management add to stockholders' wealth

First step is to find the Operating Profit using this formula

Operating Profit = Sales - Operating costs

Let plug in the formula

Operating Profit= $21 million - $17 million

Operating Profit=$4,000,000

Second step is to find the Net Operating Profit After Taxes

Net Operating Profit After Taxes

= $4,000,000 * (1-0.25)

Net Operating Profit After Taxes

=$4,000,000 * 0.75

Net Operating Profit After Taxes

=$3,000,000

Last step is to find the Economic Value added using this formula

Economic Value added = Net Operating Profit After Taxes - Invested Capital * Weighted Average Cost of Capital

Let plug in the formula

Economic Value added= $3,000,000 - $15,000,000 * 0.1

Economic Value added=$12,000,000*0.1

Economic Value added= $1,200,000

Therefore the amount of value that the management add to stockholders' wealth will be $1,200,000