The company’s cost of capital is 8.5%. a. Calculate Watervan’s economic value ad
ID: 2789862 • Letter: T
Question
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.)
b. What is the company’s return on capital? (Use start-of-year rather than average capital.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
c. What is its return on equity? (Use start-of-year rather than average equity.) (Enter your answer as a percent rounded to 2 decimal places.)
d. Is the company creating value for its shareholders?
Yes
No
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 $ 63Explanation / Answer
Answer to Part a.
EVA = After Tax Interest + Net Income – (Total Capitalization * Cost of Capital]
Total Capitalization = $325 + $256
Total Capitalization = $581
Tax Rate = Taxes / Income before Tax * 100
Tax Rate = 34 / 97 * 100
Tax rate = 35.05%
EVA = [12 * (1 – 0.3505)] + 63 – (581 * 8.5%)
EVA = 7.794 + 63 – 49.385
EVA = $21.409
Answer to Part b.
Return on Capital = (After Tax Interest Expense + Net income) / Capital Invested * 100
Capital Invested = $256 + $121
Capital Invested = $377
Tax Rate = Taxes / Income before Tax * 100
Tax Rate = 34 / 97 * 100
Tax rate = 35.05%
Return on Capital = [(12 * (1 – 0.3505) + 63] / 377 * 100
Return on Capital = [7.794 + 63] / 377 * 100
Return on Capital = 18.78%
Answer to Part c.
Return on Equity = Net Income / Shareholders’ Equity * 100
Return on Equity = 63 / 256 * 100
Return on Equity = 24.61%
Answer to Part d.
Yes, the Company is creating value for its shareholder which is indicated by its Economic Value added.