CAD Corp Inc.reported $15,000 of sales and $6,000 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

First, we need to calculate the company's net operating profit after taxes (NOPAT):
NOPAT = Operating income * (1 - Tax rate)
NOPAT = ($15,000 - $6,000) * (1 - 0.4) = $5,400

Then we calculate the company's economic value added (EVA):
EVA = NOPAT - (Capital * WACC)
EVA = $5,400 - ($18,750 * 0.095) = $3,150

Therefore, management added $3,150 of value to shareholders' wealth during the year. Answer choice C is correct.