Chapter 7, Problem 20PROB

Summary Introduction

The company had a net income of $1,200,000, interest expense of $1,500,000 and a marginal tax rate of 40%. Invested capital was $8,000,000 and average cost of the fund is 10%.

Economic Value Added (EVA) is based on a technique that the earnings generated by the company should be enough to meet the investors funds. Any amount greater than the cost to investors would add to the company’s value. EVA can be calculated using the below equation:

$\begin{array}{rr}EVA& =EBIT\times \left(1-T\right)-\left[\left(\text{Average Cost Of Fund}\right)\times \left(\text{Invested Capital}\right)\right]\hfill \\ where,\\ EBIT& =\text{Earnings before interest and tax}\hfill \end{array}$