The company’s cost of capital is 8.5%. a. Calculate Watervan’s economic value added (EVA). (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b. What is the company’s return on capital? (Use start-of-year rather than average capital.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. What is its return on equity? (Use start-of-year rather than average equity.) (Enter your answer as a percent rounded to 2 decimal places.) d. Is the company creating value for its shareholders?

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2020-10-20T19:07:03+02:00

Answer:

A. $21.32 millions

B. 10.45%

C. 22.19%

D. Yes

Explanation:

A. Calculation for the Watervan’s economic value added (EVA)

Using this formula

Economic value added (EVA) = [EbIT x (1 - tax rate)] - (Cost of capital x invested capital)

Let plug in the formula

Economic value added (EVA)

= 98 millions x (1 - 0.21) - (8.5% x 660 million)

Economic value added (EVA)= 77.42 millions - 56.1 millions

Economic value added (EVA)= $21.32 millions

Calculation for Tax rate

Tax rate = 15.75/75 x 100

Tax rate= 21%

B. Calculation for the company’s return on capital

Using this formula

Return on capital = Net income/invested capital

Let plug in the formula

Return on capital= 59.25/567 x 100

Return on capital = 10.45%

C. Calculation for return on equity

Using this formula

Return on equity = Net Income/Shareholders equity

Let plug in the formula

Return on equity= 59.25/267 x 100

Return on equity= 22.19%

D. Yes the company is creating value for its shareholders reason been that the company return on equity is on the high side .