Question

Endotrope Corporation has an after-tax operating income of $3,200,000 and a 9% weighted-average cost of capital. Assets total $7,000,000 and current liabilities total $1,800,000. On the basis of this information, Endotrope's economic value added is: ___________.
A. $2,408,000.
B. $2,732,000.
C. $3,668,000
D. $3,992,000.
E. None of the answers is correct.

Answer 1

Answer:

B. $2,732,000.

Explanation:

After-tax operating income (ATI) = $3,200,000

Weighted-average cost of capital (WA) = 9%

Assets (A) = $7,000,000

Liabilities (L) = $1,800,000

Economic value added (EVA) is given by:

$EVA = ATI -[(A-L)*WA]\\EVA = \ 3,200,000 - [(\ 7,000,000-\ 1,800,000)*0.09]\\EVA = \ 2,732,000$

Endotrope's economic value added is $2,732,000