Question

Portia Products Inc. has been asked by its shareholders to calculate the economic value added (EVA) for the current year. Portia's controller has the following information available: $1,600,000 $5,200,000 $2,800,000 $2,400,000

Answer 1

In the above question, there is less information.

Availiable informayion is:

Before-tax profit $6,000,000
Total assets 10,000,000
Current liabilities 2,000,000
Average interest rate on debt 10%
Average tax rate 40%

The company's EVA is:
a. $1,600,000
b. $5,200,000
c. $2,800,000
d. $2,400,000

sol)

Before-tax profit = $6,000,000

Total Assets = $10,000,000

Current Liabilities = $2,000,000

Average Interest Rate on Debt = 10%

Average Tax Rate = 40%

EVA = Net Operating Profit After-taxes (NOPAT) – (Capital * Cost of Capital)

Net Operating Profit After-taxes (NOPAT) = [$6,000,000 – ($6,000,000 * 0.40)]

Net Operating Profit After-taxes (NOPAT) = [$6,000,000 - $2,400,000]

Net Operating Profit After-taxes (NOPAT) = $3,600,000

EVA = NOPAT – Capital Charges

Capital Charges = [Invested Capital * Cost of Capital]

Total Assets = [Total Liabilities + Stockholder’s Equity]

$10,000,000 = $10,000,000

Total Liabilities + Stockholder’s Equity = $10,000,000

Total Liabilities + Stockholder’s Equity – Current Liabilities = Total Debt + Total Equity

Total Debt + Total Equity = Total Capital

$10,000,000 - $2,000,000 = $8,000,000

Total Debt + Total Equity = $8,000,000

Capital Charges = [$8,000,000 * 0.10]

Capital Charges = $800,000

EVA = NOPAT – Capital Charges

EVA = [$3,600,000 - $800,000]

EVA = $2,800,000

Hence, the correct option is (c) $2,800,000