Figure 6
The following results for the year pertain to the Maddox Division of Ryan Ltd.:
The weighted average cost of capital is 12 percent. The firm's minimum required rate of return is 14 percent. Taxes for the firm are 40 percent.
-Refer to Figure 6 above. If the total capital employed by the Maddox Division is £800,000, what is the economic value added (EVA)?
A) £12,000
B) £96,000
C) £108,000
D) £180,000

Question

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as EVA = NOPAT - (WACC * capital employed), where NOPAT is net operating profit after taxes, and WACC is the weighted average cost of capital. Given that the total capital employed is £800,000 and the WACC is 12%, the cost of capital is £800,000 * 12% = £96,000. If the firm's minimum required rate of return is 14%, this is not directly used in the EVA calculation but rather indicates the firm's target return. Without explicit profit figures, we cannot directly calculate NOPAT from the information provided. However, given the choices and the need to find a solution, we infer that the correct answer must be deduced from the given options and the calculation method described. Since the calculation method and the necessary figures for a direct calculation are not provided, and assuming a typical EVA calculation approach, the correct answer is chosen based on the information that would typically be used to calculate EVA, which involves subtracting the cost of capital from NOPAT. Without specific profit figures, we select the answer that aligns with the standard approach to calculating EVA, acknowledging that a direct calculation cannot be performed with the given data.

Figure 6 The Following Results for the Year Pertain to the Maddox