A company has gathered the following information about a potential fixed asset purchase: If the company has a 20% tax rate and their Economic Value Added (EVA) is $112.00, then what is their Weighted Average Cost of Capital (WACC)?
A) 8.2%
B) 16.20%
C) 16.94%
D) 21.18%

Question

A company has gathered the following information about a potential fixed asset purchase:  If the company has a 20% tax rate and their Economic Value Added (EVA) is $112.00, then what is their Weighted Average Cost of Capital (WACC)?
A) 8.2% 
B) 16.20% 
C) 16.94% 
D) 21.18%

Quizplus · Accepted Answer

This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). Before solving for EVA, solve for the Operating Income after depreciation by subtracting depreciation. $15,000/10 years = $1,500 in depreciation expenses per year. Operating Income = $4,677 - $1,500 = $3,177. $112.00 = ($3,177.00 × (1 - 0.20)) - (WACC × $15,000.00). $112.00 = $2,541.60 - (WACC × $15,000.00). (WACC × $15,000.00) = $2,541.60 - $112.00. WACC × $15,000.00 = $2,429.60. Now, divide each side by $15,000 to solve for WACC. WACC = 16.20% (Choice B).

A Company Has Gathered the Following Information About a Potential