Question

GPD Corporation has operating income (EBIT) of $300,000, total assets of $1,500,000, and its capital structure consists of 40% debt and 60% common equity.Total assets equal total invested capital. The firm’s after-tax cost of capital is 10.5% and its tax rate is 40%. The firm has 50,000 shares of common stock currently outstanding and the current price of a share of common stock is $27.00. What is the firm’s Economic Value Added (EVA)?

Answer 1

Answer:

$22,500

Explanation:

First step is to calculate the net income which shall be calculated using the following formula:

EBIT                                          $300,00

taxes(300,000*40%)              ($120,000)

Net income                             $180,000

Now we have to calculate the EVA which can be determined using the below mentioned formula:

EVA=Net income- (invested capital*cost of capital)

      =180,000-(1,500,000*10.5%)

      =$22,500