Gallop Company has total assets of $600,000, a 10% target rate of return, a return on investment of 12%, an 8% weighted average cost of capital, and current liabilities of $100,000. What is Gallop
Company's economic value added assuming that the income tax rate is 40%?
A) $3,200
B) $32,000.
C) -$4,800
D) -$6,800

Question

Gallop Company has total assets of $600,000, a 10% target rate of return, a return on investment of 12%, an 8% weighted average cost of capital, and current liabilities of $100,000. What is Gallop
 Company's economic value added assuming that the income tax rate is 40%?
A) $3,200
B) $32,000.
C) -$4,800
D) -$6,800

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as NOPAT - (Capital * WACC). NOPAT is calculated as ROI * Total Assets * (1 - Tax Rate). Here, NOPAT = 12% * $600,000 * (1 - 0.4) = $43,200. Capital = Total Assets - Current Liabilities = $600,000 - $100,000 = $500,000. EVA = $43,200 - ($500,000 * 8%) = $43,200 - $40,000 = $3,200.

Gallop Company Has Total Assets of $600,000, a 10% Target