HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation).The company had $18,750 of investor-supplied operating assets (or capital),the weighted average cost of that capital (the WACC) was 9.5%,and the combined federal and provincial income tax rate was 40%.How much value did management add to shareholders' wealth during the year?

Question

Quizplus · Accepted Answer

The Economic Value Added (EVA) is calculated as NOPAT - (Capital * WACC). NOPAT is calculated as (Sales - Operating Costs) * (1 - Tax Rate) = ($12,500 - $7,025) * (1 - 0.40) = $3,285. Capital * WACC = $18,750 * 0.095 = $1,781.25. EVA = $3,285 - $1,781.25 = $1,503.75.

HHH IncReported $12,500 of Sales and $7,025 of Operating Costs (Including