A firm has after-tax operating income of $12 million and a cost of capital of 17%. What amount of funding (consider it to be inclusive of debt and equity)will generate an EVA of zero?

Question

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated as EVA = NOPAT - (WACC * Total Capital), where NOPAT is net operating profit after tax, and WACC is the weighted average cost of capital. For EVA to be zero, NOPAT must equal the cost of capital times the total capital. Given NOPAT is $12 million and the cost of capital is 17%, we solve for total capital: $12 million = 0.17 * Total Capital, which gives Total Capital = $12 million / 0.17 = $70.59 million.

A Firm Has After-Tax Operating Income of $12 Million and a Cost