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New Inc
New Inc. is a battery manufacturing firm. It has a weighted average cost of capital of 7.80%. It has total operating capital of $17,500,000. The company's earnings before interest and taxes is $2,550,000 and the company's tax rate is 24%. Given this information what is the company's economic value added?
Question 25 options:
a)$1,365,000
b)$1,938,000
c)$2,262,000
d)$573,000
Expert Solution
Computation of Economic Value Added (EVA):
Economic Value Added (EVA) = NOPAT - (WACC*Capital Invested)
Here,
NOPAT = Earnings after Interest and Taxes*(1-Tax Rate) = $2,550,000*(1-24%) = $1,938,000
WACC = 7.80%
Capital Invested = $17,500,000
Economic Value Added (EVA) = $1,938,000 - (7.80%*$17,500,000) = $1,938,000-$1,365,000 = $573,000
So, the correct option is D "$573,000".
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