Carolina Corporation has an after-tax operating income of $3,200,000 and a 9% weighted-average cost of capital.Assets total $7,000,000 and current liabilities total $1,800,000.On the basis of this information,Carolina's economic value added is:

Question

Quizplus · Accepted Answer

To calculate economic value added (EVA), we first need to calculate net operating profit after taxes (NOPAT) which can be calculated as follows:

NOPAT = Operating Income * (1 - Tax Rate)
NOPAT = $3,200,000 * (1 - 0.35)
NOPAT = $2,080,000

Next, we need to calculate the total cost of capital which would include both debt and equity. Since we are not given any information regarding the debt and equity mix, we will assume that the capital structure is 100% equity. Therefore, the total cost of capital would be the same as the weighted-average cost of capital which is 9%.

Total Invested Capital = Total Assets - Current Liabilities
Total Invested Capital = $7,000,000 - $1,800,000
Total Invested Capital = $5,200,000

EVA = NOPAT - Total Cost of Capital * Total Invested Capital
EVA = $2,080,000 - 0.09 * $5,200,000
EVA = $2,080,000 - $468,000
EVA = $2,732,000

Therefore, the economic value added for Carolina Corporation is $2,732,000. Option B is the correct answer.

Carolina Corporation Has an After-Tax Operating Income of $3,200,000 and a 9