Stonex Corp,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%,and equity capital with a market value of $14,000,000 and a cost of equity of 12%.Stonex has two operating divisions,the Blue division and the Gold division,with the following financial measures for the current year: $$\begin{array} { | l | l | l | l | }
\hline & \text { Total Assets } & \text { Current Liabilities } & \text { Operating Income } \
\hline \text { Blue Div. } & \$ 9,500,000 & \$ 2,500,000 & \$ 1,155,000 \
\hline \text { Gold Div. } & \$ 10,000,000 & \$ 2,400,000 & \$ 1,200,000 \
\hline
\end{array}$$ Calculate EVA for the Gold Division.
A) ($57,640)
B) ($27,840)
C) ($37,340)
D) $397,440

Question

Stonex Corp,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%,and equity capital with a market value of $14,000,000 and a cost of equity of 12%.Stonex has two operating divisions,the Blue division and the Gold division,with the following financial measures for the current year: $$\begin{array} { | l | l | l | l | } 
\hline & \text { Total Assets } & \text { Current Liabilities } & \text { Operating Income } \
\hline \text { Blue Div. } & \$ 9,500,000 & \$ 2,500,000 & \$ 1,155,000 \
\hline \text { Gold Div. } & \$ 10,000,000 & \$ 2,400,000 & \$ 1,200,000 \
\hline
\end{array}$$ Calculate EVA for the Gold Division.
A) ($57,640)
B) ($27,840)
C) ($37,340)
D) $397,440

Quizplus · Accepted Answer

To calculate EVA for the Gold Division, we first need to determine the Net Operating Profit After Taxes (NOPAT) and the Capital Charge. NOPAT is calculated as Operating Income minus taxes: $1,200,000 * (1 - 0.40) = $720,000. The Capital Charge is the Weighted Average Cost of Capital (WACC) multiplied by the division's capital employed. WACC = (Debt/Total Value * Cost of Debt * (1-Tax Rate)) + (Equity/Total Value * Cost of Equity) = (6/20 * 0.08 * (1-0.40)) + (14/20 * 0.12) = 0.0968 or 9.68%. Capital employed for Gold Division = Total Assets - Current Liabilities = $10,000,000 - $2,400,000 = $7,600,000. Capital Charge = $7,600,000 * 0.0968 = $737,840. EVA = NOPAT - Capital Charge = $720,000 - $737,840 = ($17,840). However, the closest option is B) ($27,840), indicating a possible rounding or calculation error in the options provided.

Stonex Corp,whose Tax Rate Is 40%,has Two Sources of Funds