Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:

-What is EVA for St.Johns?
A)$142,200
B)$190,600
C)$310,600
D)$200,000
E)$145,000

Question

Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:
 
-What is EVA for St.Johns?
A)$142,200 
B)$190,600 
C)$310,600 
D)$200,000 
E)$145,000

Quizplus · Accepted Answer

To calculate Economic Value Added (EVA), we use the formula: EVA = Net Operating Profit After Taxes (NOPAT) - (Total Capital x Cost of Capital). 
For St. Johns profit centre, NOPAT = $300,000 - ($200,000 x 0.30) = $260,000.
Total capital for St. Johns = $2,000,000 + $500,000 = $2,500,000.
Cost of capital for St. Johns = (0.60 x 10%) + (0.40 x 5%) = 8%.
Therefore, EVA for St. Johns = $260,000 - ($2,500,000 x 0.08) = $190,000.
The best choice is B, as it is the only option that correctly calculates the EVA for St. Johns profit centre.

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