Question

Scranton Shipyards has $20 million in total investor-supplied operating capital, and its WACC is 10%. Scranton has the following income statement: Sales $10.0 million Operating costs 6.0 million Operating income (EBIT) $ 4.0 million Interest expense 2.0 million Earnings before taxes (EBT) $ 2.0 million Taxes (40%) 0.8 million Net income $ 1.2 million What is Scranton's EVA

Answer 1

Answer: $400,000

Explanation: Given the following :

Operating Income (EBIT) = $4,000,000

Weighted average cost of Capital (WACC) = 10% = 0.1

Operating capital = $20,000,000

Taxes = 40% = 0.4

Economic Value Added (EVA) is given by;

EBIT x (1-Tax) - (WACC x Operating capital)

$4,000,000 × (1-0.4) - (0.1 × 20,000,000)

$4,000,000 × (0.6) - (2,000,000)

$2400,000 - $2,000,000

=$400,000