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Economic Value Added

Economic Value Added. Economic value added tells us how much shareholder wealth is being created. 13- 1. Weighted average cost of capital. . (. ). Investment center’s total assets. Investment center’s current liabilities. –. (. ). (. ). After-tax cost of debt.

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Economic Value Added

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  1. Economic Value Added Economic value added tells us how much shareholder wealth is being created. 13-1

  2. Weightedaveragecost of capital  ( ) Investmentcenter’s total assets Investmentcenter’scurrent liabilities – ( ) ( ) After-taxcost ofdebt Marketvalueof debt Cost ofequity capital Marketvalueof equity    Marketvalueof debt Marketvalueof equity  Economic Value Added Investment center’s after-tax operating income – Investment charge = Economic Value Added 13-2

  3. EconomicValueAdded The Atlantic Division of Suncoast Food Centers reportedthe following results for the most recent period: Compute Atlantic Division’s economic value added. 13-3

  4. (9% × (1 – 30%) × $40,000,000) + (12% × $60,000,000) = 0.0972 $40,000,000 + $60,000,000 Economic Value Added First, let’s compute theweighted-average cost of capital 13-4

  5. Economic Value Added $6,750,000 × (1 – 30%) $4,725,000 After-tax operating income – 4,315,680 = $ 409,320 Economic value added ($45,000,000 – $600,000) × 0.0972 = $4,315,680 (9% × (1 – 30%) × $40,000,000) + (.12 × $60,000,000) = 0.0972 $40,000,000 + $60,000,000 13-5

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