Question

Home Depot entered fiscal 2016 with a total capitalization of $27,216 million. In 2016, debt investors received interest income of $831 million. Net income to shareholders was $6,348 million. (Assume a tax rate of 35%.)

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

Solution:

The formula for calculating Economic value added is

= Net operating profit after tax - ( Capital Investment * Cost of capital )

Net operating profit after tax = Net Income to shareholders + [ Interest expense * ( 1 - tax rate ) ]

As per the information given in the question we have

Capital Investment = $ 27,216 million ; Cost of Capital = 10 % ;

Net Income to shareholders = $ 6,348 million ; Interest expense = $ 831 million ;

Tax rate = 35 % = 0.35

Applying the above values in the Net operating profit after tax formula we have

= $ 6,348 million + [ $ 831 million * ( 1 - 0.35 ) ]

= $ 6,348 million + [ $ 831 million * 0.65 ]

= $ 6,348 million + $ 540.15 million

= $ 6,888.15 million

Thus the Net operating profit after tax = NOPAT = $ 6,888.15 million

Calculation of Economic Value added :

= $ 6,888.15 million - ( $ 27,216 million * 10 % )

= $ 6,888.15 million - ( $ 27,216 million * 10 % )

= $ 6,888.15 million - $ 2,721.60 million

= $ 4,166.55 million

Thus the Economic value added = $ 4,166.55 million