Question

question 5

Waldorf Company has two sources of funds: long-term debt with a market and book value of $9 million issued at an interest rate of 10%, and equity capital that has a market value of $6 million (book value of $2 million). The cost of equity capital is 5%, while the tax rate is 30%.   What is the EVA for St. johns?

	before tax Operating Income	Assets	Current Liabilities
ottawa	$   480000	$ 2000,000	$   100,000
st johns	$600000	$ 4,000,000	$   300,000
regina	$1020000	$6000000	$600000

what is EVA for ST. Johns ?

1-$190600

2-$145000

3-$310600

4-$142200

5-$200000

Answer 1

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	Correct option is: 1. $1,90,600
			Economic Value added (in'millions)
	St Johns	=	$                                          1,90,600
	Workings:
	Computation of EVA:
	EVA	=	NOPAT - WACC (Total assets - current liabilities)
	Where,
	NOPAT	=	Net operating profit after tax
	WACC	=	Weighted average cost of capital
	Computation of WACC
	Cost of debt (kd)	=	10%
	Tax rate (t)	=	30%
	After tax cost of debt	=	kd (1 - t)
		=	10%(1-0.30)
		=	7%
	Market Value of debt	=	$                                        90,00,000
	Cost of equity (ke)	=	5%
	Market value of equity	=	$                                        60,00,000
	WACC	=	[($9000000 X 7%) + ($6000000 X 5%)] / ($9000000 + $6000000)
		=	6%
	Computation of EVA:
			Real estate
	Before-tax operating income	=	$                                          6,00,000
Less:	Tax @30%	=	$                                          1,80,000
(a)	NOPAT	=	$                                          4,20,000
	Total Assets	=	$                                        40,00,000
Less:	Current Liabilities	=	$                                          3,00,000
(b)	(Total assets - current liabilities)	=	$                                        37,00,000
(c)	WACC (%)	=	6%
(d)	WACC ($) [(b) X (c)]	=	$                                          2,29,400
	EVA [(a) - (d)]	=	$                                          1,90,600