St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4
Current assets $120,000 $100,000
Property, plant and equipment (cost)300,000 280,000
Accumulated amortization 80,000 60,000
Current liabilities 90,000 70,000
Long-term debt 85,000 80,000
Pretax operating income 52,800 48,900
Income tax rate 30% 30%
What was the St. John's Division EVA for 20x5?
A)$3,960
B)$11,960
C)$20,460
D)$27,800

Question

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated as NOPAT - (Capital * Cost of Capital). NOPAT (Net Operating Profit After Tax) for 20x5 is $52,800 * (1 - 0.30) = $36,960. Capital is calculated as (Current Assets + Property, Plant, and Equipment - Accumulated Amortization - Current Liabilities) = ($120,000 + $300,000 - $80,000 - $90,000) = $250,000. The cost of capital is 15%. Therefore, EVA = $36,960 - ($250,000 * 0.15) = $36,960 - $37,500 = -$540. However, the correct calculation should consider the weighted average cost of capital (WACC) of 10%, not the required rate of return. So, EVA = $36,960 - ($250,000 * 0.10) = $36,960 - $25,000 = $11,960.

St John's Division Has a Required Rate of Return of 15