The Gnome Company has provided the following information:
$$\begin{array} { | l | l | }
\hline \text { Income tax rate } & 30 \% \
\hline \text { Target rate of return } & 12 \% \
\hline \text { Total assets } & \$ 300,000 \
\hline \text { Total liabilities } & \$ 150,000 \
\hline \text { Current liabilities } & \$ 50,000 \
\hline \text { Operating income } & \$ 40,000 \
\hline \text { Economic value added } & \$ 3,000 \
\hline
\end{array}$$ What was Gnome's weighted average cost of capital?
A) 8%
B) 10%
C) 14%
D) 12%

Question

The Gnome Company has provided the following information:
$$\begin{array} { | l | l | } 
\hline \text { Income tax rate } & 30 \% \
\hline \text { Target rate of return } & 12 \% \
\hline \text { Total assets } & \$ 300,000 \
\hline \text { Total liabilities } & \$ 150,000 \
\hline \text { Current liabilities } & \$ 50,000 \
\hline \text { Operating income } & \$ 40,000 \
\hline \text { Economic value added } & \$ 3,000 \
\hline
\end{array}$$ What was Gnome's weighted average cost of capital?
A) 8%
B) 10%
C) 14%
D) 12%

Quizplus · Accepted Answer

The Economic Value Added (EVA) is calculated as: EVA = NOPAT - (WACC * Capital). Given EVA = $3,000, NOPAT = $40,000 * (1 - 0.30) = $28,000, and Capital = Total assets - Current liabilities = $300,000 - $50,000 = $250,000. Solving for WACC gives WACC = (NOPAT - EVA) / Capital = ($28,000 - $3,000) / $250,000 = 10%.

The Gnome Company Has Provided the Following Information What Was Gnome's Weighted Average Cost of Capital? A) 8

The Gnome Company Has Provided the Following Information What Was Gnome's Weighted Average Cost of Capital?
A) 8