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For 2018, Gourmet Kitchen Products reported $23 million of sales and $18 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10% and its federal-plus-state income tax rate was 35%. What was the firm's economic value added (EVA), that is, how much value did management add to stockholders' wealth during 2018?

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abiolataiwo2015

Answer:

$1,750,000

Explanation:

Calculation for how much value did management add to stockholders' wealth during 2018

First step is to calculate the Operating income

Operating income=23 million-18 million

Operating income= 5 million

Now let calculate the EVA=

EVA= (5,000,000 *(100-35%))-($15,000,000*10%)

EVA=($5,000,000*65%)- ($15,000,000*10%)

EVA=$3,250,000-$1,500,000

EVA=$1,750,000

Therefore the amount of value that the management add to stockholders' wealth during 2018 will be $1,750,000

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