Question

1. Within your company above, the Human Resources Division has $2,500,000 in total assets, which is the total capital employed by this division. The tax rate is 30% and the Earnings Before Interest and Tax (EBIT) of Human Resources is $800,000. What is the Economic Value Added (EVA) for the Human Resources Division?

*FYI: Cost of Debt = 7.14% (1-.30) = 5.0%

b. Within your company above, the Recruiting Division has $1,200,000 in total assets, which is the total capital employed by this division. The tax rate is 20% and the Earnings Before Interest and Tax (EBIT) of Recruiting is $100,000. What is the Economic Value Added (EVA) for the Recruiting Division?

c. Is the Recruiting Division adding to the economic value of this company?

*FYI: Cost of Debt = 5.0% (1-.20) = 4.0%

Could you please answer these asap?

thanks!

Answer 1

a.

EVA = Earnings after tax - (Capital Employed) * WACC.
=	520016-(2500000*5%)
EVA=	3,95,016.00
EBIT	8,00,000.00
Interest (7.14%)	57,120.00
Earnings before tax	7,42,880.00
Tax (30%)	2,22,864.00
Earnings after tax	5,20,016.00
Capital Employed	25,00,000
WACC	5%

b.

EVA=	76000-(1200000*4%)
=	28,000.00
EBIT	1,00,000.00
Interest (5%)	5,000.00
Earnings before tax	95,000.00
Tax (20%)	19,000.00
Earnings after tax	76,000.00
Capital Employed	12,00,000
WACC	4%

c. yes.

Because EVA is a positive value

Hope you understood, Thank you.