Thatcher Corporation has an after-tax operating income of $4,200,000 and an 8% weighted-average cost of capital. Assets total $8,000,000 and current liabilities total $1,500,000. On the basis of this information, Thatcher's economic value added is:

Question

Quizplus · Accepted Answer

Economic value added (EVA) is calculated as after-tax operating income minus the total dollar cost of capital, which is the product of the weighted average cost of capital (WACC) and the total capital employed.

Total capital employed = Total assets - Current liabilities

Total capital employed = $8,000,000 - $1,500,000 = $6,500,000

Total dollar cost of capital = WACC x Total capital employed
Total dollar cost of capital = 0.08 x $6,500,000 = $520,000

EVA = After-tax operating income - Total dollar cost of capital
EVA = $4,200,000 - $520,000 = $3,680,000

Therefore, the economic value added of Thatcher Corporation is $3,680,000. Option B is the correct choice.

Thatcher Corporation Has an After-Tax Operating Income of $4,200,000 and an 8