In 2012 Advantage Cable Inc.had $250,000 in invested capital,a WACC of 9.35%,EBIT of $75,000,and a tax rate of 30%.With this information please estimate the economic value added (EVA)for the firm.

Question

Quizplus · Accepted Answer

1. Calculate the cost of capital:

WACC = (Cost of Equity x % Equity) + (Cost of Debt x % Debt) x (1 - Tax Rate)

Assuming the company has only equity, the cost of equity becomes the WACC:

9.35% = Cost Of Equity

2. Calculate the NOPAT:

NOPAT = EBIT x (1 - Tax rate)

NOPAT = 75,000 x (1 - 0.30)

NOPAT = $52,500

3. Calculate the capital charge:

Capital Charge = WACC x Invested Capital

Capital Charge = 9.35% x $250,000

Capital Charge = $23,375

4. Calculate EVA:

EVA = NOPAT - Capital Charge

EVA = $52,500 - $23,375

EVA = $29,125