Question

For 2018, Gourmet Kitchen Products reported $22 million of sales and $19 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10%, and its federal-plus-state income tax rate was 36%. What was the firm’s economic value added (EVA), that is, how much value did management add to stockholders’ wealth during 2018?

Answer 1

Answer:

The firm’s economic value added (EVA), that is, how much value did management add to stockholders’ wealth during 2018 is $0.42 million

Explanation:

Net operating profit = (22 million - 19 million)*(1 - 0.36)

                                 = $1.92  million

EVA = net operating profit after taxes - invested capital*WACC

        = 1.92 million - 15 million*0.10

        = $0.42 million

Therefore, The firm’s economic value added (EVA), that is, how much value did management add to stockholders’ wealth during 2018 is $0.42 million