Houston Pumps recently reported net income of $600,000, and an interest expense of $230,000. The company has total invested capital employed of $7.2 million, a tax rate of 40%, and an after-tax cost of capital of 10%. What is the company's EVA? Your answer should be between 9200 and 37500, rounded to even dollars (although decimal places are okay), with no special characters.
Houston Pumps recently reported net income of $600,000, and an interest expense of $230,000. The company has total invested capital employed of $7.2 million, a tax rate of 40%, and an after-tax cost of capital of 10%. What is the company's EVA? Your answer should be between 9200 and 37500, rounded to even dollars (although decimal places are okay), with no special characters.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Houston Pumps recently reported net income of $600,000, and an interest expense of $230,000. The
company has total invested capital employed of $7.2 million, a tax rate of 40%, and an after-tax cost of
capital of 10%. What is the company's EVA?
Your answer should be between 9200 and 37500, rounded to even dollars (although decimal places are
okay), with no special characters.
Expert Solution
Step 1
Economic Value Added (EVA):
- It represents the true economic profit of a firm. Thus, it is a measure of firm value generated from the invested funds.
- EVA is only a reliable measure of firm value when the firm has heavy tangible assets. However, EVA is not a good measure of firm value when the firm has more intangible assets than tangible assets.
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