For 2012, Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation). The company has $20,500 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 10%, and the federal-plus-state income tax rate was 40%. What was the firm's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during 2012?

Question

Quizplus · Accepted Answer

To calculate EVA, we need to first find Net Operating Profit After Tax (NOPAT):

NOPAT = Operating Income * (1 - Tax Rate) 
      = ($11,500 - $5,000) * (1 - 0.4) 
      = $3,300

Next, we need to find the total cost of capital (TCC):

TCC = Total Assets * WACC 
    = $20,500 * 0.1 
    = $2,050

Finally, we can calculate EVA:

EVA = NOPAT - TCC 
    = $3,300 - $2,050 
    = $1,850

Therefore, the answer is C. The management added $1,850 to stockholders' wealth during 2012.

For 2012, Bargain Basement Stores Reported $11,500 of Sales and $5,000