Answer the following questions using the information below:
Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15 million issued at an interest rate of 10%,and equity capital that has a market value of $9 million (book value of $5 million).Coldbrook Company has profit centres in the following locations with the following operating profits,total assets,and current liabilities.The cost of equity capital is 15%,while the tax rate is 30%.
$$\begin{array} { | l | r | r | r | }
\hline & \text { Operating Profit } & { \text { Assets } } & \text { Current Liabilities } \
\hline \text { Darwin } & \$ 815000 & \$ 3750000 & \$ 800000 \
\hline \text { Hobart } & \$ 1100000 & \$ 5000000 & \$ 1200000 \
\hline \text { Newcastle } & \$ 2450000 & \$ 9250000 & \$ 3180000 \
\hline
\end{array}$$
-What is the EVA for Darwin?
A)$305 000
B)$338 563
C)$275 500
D)$255 500

Question

Answer the following questions using the information below:
Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15 million issued at an interest rate of 10%,and equity capital that has a market value of $9 million (book value of $5 million).Coldbrook Company has profit centres in the following locations with the following operating profits,total assets,and current liabilities.The cost of equity capital is 15%,while the tax rate is 30%.
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Operating Profit } &  { \text { Assets } } & \text { Current Liabilities } \
\hline \text { Darwin } & \$ 815000 & \$ 3750000 & \$ 800000 \
\hline \text { Hobart } & \$ 1100000 & \$ 5000000 & \$ 1200000 \
\hline \text { Newcastle } & \$ 2450000 & \$ 9250000 & \$ 3180000 \
\hline
\end{array}$$
-What is the EVA for Darwin?
A)$305 000
B)$338 563
C)$275 500
D)$255 500

Quizplus · Accepted Answer

The Economic Value Added (EVA) is calculated as NOPAT - (Capital * WACC). For Darwin, NOPAT = Operating Profit * (1 - Tax Rate) = $815,000 * (1 - 0.30) = $570,500. Capital = Assets - Current Liabilities = $3,750,000 - $800,000 = $2,950,000. WACC = (Debt/Total Value * Cost of Debt * (1 - Tax Rate)) + (Equity/Total Value * Cost of Equity) = ($15M/$24M * 10% * (1 - 0.30)) + ($9M/$24M * 15%) = 0.04375 + 0.05625 = 0.10. EVA = $570,500 - ($2,950,000 * 0.10) = $570,500 - $295,000 = $275,500.

Answer the Following Questions Using the Information Below: Coldbrook Company

Answer the Following Questions Using the Information Below:
Coldbrook Company