Question

Scranton Shipyards has $8.5 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement: Sales $10.0 million Operating costs 6.0 million Operating income (EBIT) $4.0 million Interest expense 2.0 million Earnings before taxes (EBT) $ 2.0 million Taxes (25%) 0.5 million Net income $ 1.5 million What is Scranton's EVA? Answer options are provided in whole dollar. $1,472,500 $1.860,000 $1,937.500 $2.956,500

Answer 1

Economic value added (EVA) is measure of profit to firm in excess of required profit.

$\dpi{100} \textup{EVA = Operating Profit after tax - (Total Invested operating capital)*WACC}$

where,

Operating Profit after tax = EBIT*(1-Tax rate)

Thus, we can write -

$\dpi{100} \textup{EVA = EBIT*(1-tax rate) - (Total Invested operating capital)*WACC}$

Provided,

EBIT = $4,000,000

Tax rate = 25%

Total invested operating capital = $8,500,000

WACC = 10%

putting the values -

$\dpi{100} \textup{EVA = 4,000,000*(1-0.25) - (8,500,000)*0.1}$

$\dpi{100} \textup{EVA = 4,000,000*(0.75) - (8,500,000)*0.1}$

$\dpi{100} EVA = 3,000,000 - 850,000$

$\dpi{100} \bg_green \large EVA = 2,150,000$

I think all options are not showing in above picture, let me know if there is no more option.

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.