Question

Home Depot entered fiscal 2016 with a total capitalization of $27,255 million. In 2016, debt investors received interest income of $844 million. Net income to shareholders was $6,387 million. (Assume a tax rate of 35%.) Calculate the economic value added assuming its cost of capital is 10%

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 = $ 27,255 million ; Cost of Capital = 10 % ;

Net Income to shareholders = $ 6,387 million ; Interest expense = $ 844 million ;

Tax rate = 35 % = 0.35

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

= $ 6,387 million + [ $ 844 million * ( 1 - 0.35 ) ]

= $ 6,387 million + [ $ 844 million * 0.65 ]

= $ 6,387 million + $ 548.60 million

= $ 6,935.60 million

Thus the Net operating profit after tax = NOPAT = $ 6,935.60 million

Calculation of Economic Value added :

= $ 6,935.60 million - ( $ 27,255 million * 10 % )

= $ 6,935.60 million - ( $ 27,255 million * 10 % )

= $ 6,935.60 million - $ 2,725.50 million

= $ 4,210.10 million

Thus the Economic value added of Home Depot = $ 4,210.10 million