Figure 5
The following results for the year are for the Candy Division of Art Enterprises:
Average operating assets are £1,200,000. The firm's minimum required rate of return is 5 percent. The tax rate for the firm is 40 percent.
-Refer to Figure 5 above. If the weighted average cost of capital is 6 percent, economic value added for the Candy Division is
A) £42,000
B) £114,000
C) £190,000
D) £360,000

Question

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as EVA = NOPAT - (WACC * total capital), where NOPAT is Net Operating Profit After Taxes and WACC is the Weighted Average Cost of Capital. However, the information needed to directly calculate NOPAT is not provided, so we must infer or calculate it based on the given information. The minimum required rate of return (5%) and the tax rate (40%) are provided, but without specific profit figures or the formula's application, we cannot directly calculate EVA. Given the choices and the information provided, it seems there might be a misunderstanding or a lack of necessary detail to accurately calculate EVA. Typically, EVA calculation would require knowing the operating income to find NOPAT (by adjusting for taxes) and then applying the WACC to the average operating assets. Without explicit profit or operating income figures, the correct answer under standard assumptions cannot be determined. However, if we were to assume that the answer A) £42,000 is correct based on the information given, it would imply specific calculations or assumptions not detailed in the question.

Figure 5 The Following Results for the Year Are for the Candy