ABC Company's Economic Value Added (EVA)

What is ABC Company's EVA based on the given income statement and WACC?

Calculating ABC Company's EVA

ABC Company has provided the following financial information in its 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
ABC Company's total invested capital is $20 million and its Weighted Average Cost of Capital (WACC) is 10%. To calculate ABC Company's Economic Value Added (EVA), we need to follow these steps: 1. Calculate Net Operating Profit After Taxes (NOPAT) NOPAT = Operating Income - Taxes From the income statement, we can determine that: NOPAT = $4.0 million - $0.8 million NOPAT = $3.2 million 2. Calculate EVA EVA = NOPAT - (WACC * Total Invested Capital) Given WACC = 10% and Total Invested Capital = $20 million: EVA = $3.2 million - (0.10 * $20 million) EVA = $3.2 million - $2 million EVA = $1.2 million Therefore, ABC Company's EVA based on the given income statement and WACC is $1.2 million. This indicates that the company is generating economic value by earning more than its cost of capital. EVA is a crucial metric for evaluating a company's performance in terms of generating returns above or below its cost of capital. In ABC Company's case, the positive EVA of $1.2 million signifies that the company is effectively creating value beyond its cost of capital. In conclusion, ABC Company's EVA is $1.2 million, showcasing its ability to generate economic profit and exceed its cost of capital.

← Accounting skills and attributes How to calculate cash provided by operating activities →