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Australia Astringent Enterprises has been provided by its lenders and owners with $65,000,000 to purchase assets
Australia Astringent Enterprises has been provided by its lenders and owners with $65,000,000 to purchase assets. Managers estimate the weighted average cost of capital for the company's typical investment projects to be 7.8% per year. The most recent year's income statement showed Earnings Before Interest and Taxes (EBIT, or Operating Income) of $8.250,000, and the company paid income tax at a 23% average rate. What was Economic Value Added (EVA) for the year? O A. $1.282.500 B. $11,422,500 OC. $8,626,000 OD. - $3.172,500 O E. $1,630,000
Expert Solution
Here given,
EBIT = $82,50,000
Tax rate = 23%
Net Operating profit after taxes(NOPAT) = EBIT(1-Tax rate)
= $8250000(1-0.23)
= $8250000*0.77
= $6352500
WACC= 7.8%
Capital Employed = $65000000
Capital Charge = Capital Employed*WACC
= $65000000*7.8%
= $50,70,000
EVA = NOPAT- Capital Charge
= $6352500-$50,70,000
= $12,82,500
Hence, option (A) is the correct answer.
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