Question

Here are simplified financial statements for Watervan Corporation:

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	881
Cost of goods sold		741
Depreciation		31
Earnings before interest and taxes (EBIT)	$	109
Interest expense		12
Income before tax	$	97
Taxes		34
Net income	$	63

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Current assets	$	369			$	312
Long-term assets		258				222
Total assets	$	627			$	534
Liabilities and shareholders’ equity
Current liabilities	$	194			$	157
Long-term debt		108				121
Shareholders’ equity		325				256
Total liabilities and shareholders’ equity	$	627			$	534

The company’s cost of capital is 8.5%.

a. Calculate Watervan’s economic value added (EVA). (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

Formula to calculate economic value added
Economic value added	After tax operating income - (Cost of capital*Total capitalization)
Tax rate	34/97
Tax rate	35%
Total capitalization	Long term debt + Shareholder's equity
Total capitalization	121+256
Total capitalization	$377	million
We would use start of year balance instead of average balance
After tax operating income	After tax interest expense + Net income
After tax operating income	(12*(1-0.35))+63
After tax operating income	7.80+63
After tax operating income	$70.80	million
Economic value added	70.80-(0.085*377)
Economic value added	70.80-32.045
Economic value added	$38.75
Thus, economic value added is $38.75 million.