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7. A firm has total assets of $5,000,000 and has raised money from both debt and...

7. A firm has total assets of $5,000,000 and has raised money from both debt and equity. Assume that the firm’s cost of capital is 12%. Assume that the firm earns 17% operating return on its assets (OROA) and its operating profit margin (OPM) is 20%. What is the amount of Economic Value Added for this firm?

A. $250,000

B. $400,000

C. 150,000

D. 300,000

A is the correct answer but please show how you arrive at that answer

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Answer #1

Economic value Added (EVA) = Total assets * (Operating return on assets - cost of capital)

= $5,000,000 * (17% - 12%)

= $5,000,000 * 5%

= $250,000.


Economic value Added (EVA) = $250,000.

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