Question

In: Accounting

Leslie corporation reported the following income statement and financial information for the year just ended Sales...

Leslie corporation reported the following income statement and financial information for the year just ended

Sales	3,300,000	Average invested assets	3,000,000
CGS	1,700,000	Average current liabilities	200,000
Gross Margin	1,600,000	income tax rate	30%
Selling and Admin	200,000
Operating income before support dept charged	1,400,000	capital debt at 8% average interest rate	600,000
Support Dept Charge	100,000	Equity dividend rate at 20%	1,800,000
Income from operations	1,300,000

The company uses GAAP operating income and assets net of current liabilities for evaluation purposes.

The EVA for Leslie Corporation is $_______________

Expert Solution

Solution

EVA = Economic Value Added

The formula used to determine EVA:-

EVA = NOPAT - (WACC * Capita invested), where NOPAT denotes Net operating profits after tax, WACC denotes Weighted average cost of capital and Capital invested denotes Equity + Long term debt at the beginning of the period.

NOPAT = operating profit * (1-Tax rate)
NOPAT = $ 910000

The NOPAT of Leslie Corporation is $ 910000

WACC = (Equity/Total value of financing)*cost of equity + (Debt/Total value of financing)*cost of debt * (1-taxrate)
WACC = (1800000/2400000)*20% + (600000/2400000)*8%*(1-30%)
WACC = 11.90%

The WACC of Leslie Corporation is 11.9%

Capital Invested = Net working capital + PP&E + Goodwill & Intangibles
Capital Invested = Average Invested Assets - current Liabilities
Capital Invested = 3000000-200000
Capital Invested = $ 2800000

The capital invested at Leslie Corporation is $ 2800000

EV = NOPAT - (WACC*Capital invested)

EV = $ 910000 - (11.9% * $ 2800000)

EV = $ 576800

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