Question

HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 25%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?

Answer 1

Answer:

$2,325

Explanation:

The computation of the economic value added is shown below:

Economic value added = NOPAT - total invested capital × WACC  

where,  

NOPAT = Operating income × (1 - tax rate)

= (Sales - operating cost) × (1 - 0.25)

= ($12,500 - $7,025) × (1 - 0.25)

= $4,106.25

And, the other values would remain same

= $4,106.25 - $18,750 × 9.5%

=  $4,106.25 - $1,781.25

= $2,325