Springfield Corporation, whose tax rate is 30%, has two sources of funds: long-term debt with a market value of $8,400,000 and an interest rate of 8%, and equity capital with a market value of $14,000,000 and a cost of equity of 13%. 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 Blue Division? (Round intermediary calculations to four decimal places.)
A) -$86,580
B) $86,580
C) $404,280
D) -$230,550

Question

Springfield Corporation, whose tax rate is 30%, has two sources of funds: long-term debt with a market value of $8,400,000 and an interest rate of 8%, and equity capital with a market value of $14,000,000 and a cost of equity of 13%. 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 Blue Division? (Round intermediary calculations to four decimal places.)

What is Economic Value Added (EVA®) for the Blue Division? (Round intermediary calculations to four decimal places.)
A) -$86,580 
B) $86,580 
C) $404,280 
D) -$230,550

Quizplus · Accepted Answer

WACC = [($8,400,000 × (1 - 0.3) × (0.08)) + ($14,000,000 × 0.13)] / ($8,400,000 + $14,000,000) = 0.1023
EVA = ($1,059,000× (1 - 0.3)) - (($9,500,000 - $3,100,000) × 0.1023) = $86,580

Springfield Corporation, Whose Tax Rate Is 30%, Has Two Sources