What is ABC Company's EVA based on the given income statement and WACC?
Calculating ABC Company's EVA
ABC Company has provided the following financial information in its income statement:
- Sales: $10.0 million
- Operating costs: $6.0 million
- Operating income (EBIT): $4.0 million
- Interest expense: $2.0 million
- Earnings before taxes (EBT): $2.0 million
- Taxes (40%): $0.8 million
- Net income: $1.2 million
ABC Company's total invested capital is $20 million and its Weighted Average Cost of Capital (WACC) is 10%.
To calculate ABC Company's Economic Value Added (EVA), we need to follow these steps:
1. Calculate Net Operating Profit After Taxes (NOPAT)
NOPAT = Operating Income - Taxes
From the income statement, we can determine that:
NOPAT = $4.0 million - $0.8 million
NOPAT = $3.2 million
2. Calculate EVA
EVA = NOPAT - (WACC * Total Invested Capital)
Given WACC = 10% and Total Invested Capital = $20 million:
EVA = $3.2 million - (0.10 * $20 million)
EVA = $3.2 million - $2 million
EVA = $1.2 million
Therefore, ABC Company's EVA based on the given income statement and WACC is $1.2 million. This indicates that the company is generating economic value by earning more than its cost of capital.
EVA is a crucial metric for evaluating a company's performance in terms of generating returns above or below its cost of capital. In ABC Company's case, the positive EVA of $1.2 million signifies that the company is effectively creating value beyond its cost of capital.
In conclusion, ABC Company's EVA is $1.2 million, showcasing its ability to generate economic profit and exceed its cost of capital.