Question

   b. 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%

I need to know the steps for the answers for me to understand. Please, and thank you.

Note: In question a., we had to find the WACC, and I don't know if its relevant, but the WACC is 7.8%

Answer 1

Economic Value Added (EVA) is computed using the following formula :-

EVA = EBIT * (1 - tax rate) - (WACC * Total Capital)

In this problem,

EBIT = 800,000

Tax rate = 30%

WACC = 7.8%

Total Capital = 2,500,000

Plugging in the values we get :-

EVA = 800,000 * (1 - 0.30) - ( 7.8% * 2,500,000)

= 365,000

Hence, EVA = 365,000