Question

Here are data on two firms: Equity ($ million) Debt ($ million) ROC (%) Cost of Capital (%) Acme 170 180 14 8 Apex 360 140 18 9 a-1. Calculate the higher economic value added? (Do not round intermediate calculations. Enter your answers in millions) Acme Apex Higher economic value added $ million $ million a-2. Which firm has the higher economic value added? Acme has higher economic value added Apex has higher economic value added b-1. Calculate the higher economic value added per dollar of invested capital? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Acme Apex Higher economic value added $ $ b-2. Which has higher economic value added per dollar of invested capital? Apex has higher economic value added per dollar of invested capital Acme has higher economic value added per dollar of invested capital

Answer 1

(a)(1)-Higher Economic Value Added

Economic Value Added (EVA) is calculated by using the following formula

Economic Value Added (EVA) = Total Capital x (ROC – Cost of Capital)

Economic Value Added - ACME

= [$170 + $180] x (0.14 – 0.08)

= $350 x 0.06

= $21 Million

Economic Value Added - APEX

= [$360 + $140] x (0.18 – 0.09)

= $500 x 0.09

= $45 Million

(a)(2)-Firm with higher Economic Value Added

“APEX” has the higher economic value added of $45 Million

(b)(1)- Higher economic value added per dollar of invested capital

Higher economic value added per dollar of invested capital = Economic value added / Total Invested capital

Higher Economic Value Added per dollar of invested capital - ACME

= $21 Million / $350 Million

= $0.06 per Dollar

Higher Economic Value Added per dollar of invested capital – APEX

= $45 Million / $500 Million

= $0.09 per Dollar

(b)(2)-Firm with higher economic value added per dollar of invested capital

“APEX” has the higher economic value added per dollar of invested capital of $0.09 per Dollar