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12 December, 14:49

Scranton Shipyards has $20 million in total investor-supplied operating capital, and its WACC is 10%. Scranton has the following income statement: Sales $10.0 million Operating costs 6.0 million Operating income (EBIT) $ 4.0 million Interest expense 2.0 million Earnings before taxes (EBT) $ 2.0 million Taxes (40%) 0.8 million Net income $ 1.2 million What is Scranton's EVA

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  1. 12 December, 15:14
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    Answer: $400,000

    Explanation: Given the following:

    Operating Income (EBIT) = $4,000,000

    Weighted average cost of Capital (WACC) = 10% = 0.1

    Operating capital = $20,000,000

    Taxes = 40% = 0.4

    Economic Value Added (EVA) is given by;

    EBIT x (1-Tax) - (WACC x Operating capital)

    $4,000,000 * (1-0.4) - (0.1 * 20,000,000)

    $4,000,000 * (0.6) - (2,000,000)

    $2400,000 - $2,000,000

    =$400,000
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