Question #46
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 24
Status: Unattempted
Question
SmallCo has the following characteristics: Long-term debt = $55 million Equity = $45 million WACC = 11% EBIT = $10 million Marginal tax rate = 30% SmallCo's economic value added is closest to:
Answer Choices:
A. +$1 million
B. -$1 million
C. -$4 million
Explanation
Economic value added (EVA) measures the value added for shareholders by management
during a given year. A company must produce EVA in order to increase its market value.
EVA is calculated as:
EBIT(1 − t) − $WACC
10(1 − 0.30) − 0.11(55 + 45)
7 − 11
-4