Answer the following question(s) using the information below:
Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of $12,000,000 and a cost of equity of 12%. Springfield has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:

-What is Economic Value Added (EVA) for the Gold Division?
A) -$283,200
B) -$82,560
C) $196,800
D) $397,440
E) -$195,200

Question

Answer the following question(s) using the information below:
Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of $12,000,000 and a cost of equity of 12%. Springfield has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:
 
-What is Economic Value Added (EVA) for the Gold Division?
A) -$283,200 
B) -$82,560 
C) $196,800 
D) $397,440 
E) -$195,200

Quizplus · Accepted Answer

After tax cost of debt = 60% * 8% = 4.8%
WACC = [8/20 * 4.8%] + [12/20 * 12%] = 1.92% + 7.2% = 9.12%
EVA = ($1,200,000 × (1 - .4)) - (($11,000,000 - $2,200,000) × .0912) =
$720,000 - $802,560 = -$82,560

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