Question #4

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 3

Status: Incorrect

Correct Answer: C

Your Answer: A

Part of Context Group: Q4-8 First in Group
Shared Context
- Calculate the "traditional" measure of Return on (opening) Equity for 20x6. A) 10.9%. B) 13.2%. C) 14.7%.
Question
Calculate Retty's EVA® for 20x6 based on end-of-year invested capital. (Ignore the potential problem created by the write-off of goodwill.)
Answer Choices:
A. $1.3 million negative
B. $1.2 million negative
C. $1.6 million positive
Explanation
EVA = NOPAT – $WACC NOPAT = EBIT × (1 – t) = 28.1 × (1 – 0.45) = 15.455 $WACC = WACC × invested capital = 12.5% × 110.5 = $13.81m EVA = 15.455 – 13.81 = $1.64m
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