Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:

-What is EVA for Regina?
A)$685,200
B)$342,000
C)$379,200
D)$648,000
E)$218,200

Question

Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:
 
-What is EVA for Regina?
A)$685,200 
B)$342,000 
C)$379,200 
D)$648,000 
E)$218,200

Quizplus · Accepted Answer

To calculate EVA, we need to first calculate the NOPAT (Net Operating Profit After Taxes) for each profit center.

For Regina: 
- Revenue: $24 million 
- Expenses: $16 million 
- NOPAT = (Revenue - Expenses) x (1 - Tax rate) = ($24 million - $16 million) x (1-0.3) = $5.6 million

Next, we need to calculate the required return for the assets employed in each profit center.

For Regina: 
- Assets employed: $45 million (Total assets) - $14 million (Current liabilities) = $31 million 
- Required return: 10% x $31 million (long-term debt) + 5% x $6 million (equity) = $3.1 million

Finally, we can calculate the EVA: 
- EVA = NOPAT - Required return = $5.6 million - $3.1 million = $2.5 million = $379,200 after rounding (Option C).

Therefore, the best choice is C.

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