Question

Home Depot entered fiscal 2017 with a total capitalization of $21,886 million. In 2017, debt investors received interest income of $871 million. Net income to shareholders was $8,636 million. (Assume a tax rate of 21%.)

Calculate the economic value added assuming its cost of capital is 10%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

Answer-

Economic value added EVA = [ EBIT x ( 1 - t) ] - $ WACC

Given
Net income = $ 8636 million
Tax rate = 21 % = 0.21
Net income = EBT - EBT x Tax rate = EBT x ( 1 - tax rate)
$ 8636 m = EBT x ( 1 - 0.21)
EBT = $ 8636 m / ( 1 - 0.21)
EBT = $ 8636 m / 0.79
EBT = $ 10931.64 million
EBIT = EBT + Interest expense
EBIT = $ 10931.64 m + $ 871 m
EBIT = $ 11802.64 million

Given

Total capitalization = $ 21886 million
Cost of capital (WACC) = 10 %
$ WACC = dollar cost of capital = WACC x Total capital
$ WACC = 0.10 x $ 21886 m
$ WACC = $ 2188.6 million

EVA = EBIT x ( 1 - tax rate ) - $ WACC
EVA = $ 11802.64 m x ( 1 - 0.21 ) - $ 2188.6 m
EVA = $ 11802.64 m x 0.79 - $ 2188.6 m
EVA = $ 9324.1 m - $ 2188.6 m
EVA = $ 7135.5 million