The following information relates to Hudston,Inc.:
If the company has a 10% weighted-average cost of capital,its economic value added would be:

Question

The following information relates to Hudston,Inc.: 
If the company has a 10% weighted-average cost of capital,its economic value added would be:

Quizplus · Accepted Answer

To calculate the economic value added (EVA), we need to determine the company's net operating profit after taxes (NOPAT) and subtract a capital charge.

NOPAT = Operating Income * (1 - Tax Rate) 
= $1,000,000 * (1 - 0.4) 
= $600,000

Capital charge = Weighted average cost of capital * Total capital 
= 0.1 * $6,000,000 
= $600,000

EVA = NOPAT - Capital charge 
= $600,000 - $600,000 
= $0

Therefore, the company has no economic value added at a 10% weighted-average cost of capital. However, this calculation assumes that the company is earning its cost of capital, which may not always be the case.

The Following Information Relates to Hudston,Inc