# Economic Value Added - PowerPoint PPT Presentation

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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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#### Presentation Transcript

Economic value added tells us how much shareholder wealth is being created.

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Weightedaveragecost of capital

(

)

Investmentcenter’s

total assets

Investmentcenter’scurrent liabilities

(

)

(

)

After-taxcost ofdebt

Marketvalueof debt

Cost ofequity capital

Marketvalueof equity

Marketvalueof debt

Marketvalueof equity

Investment center’s after-tax operating income

– Investment charge

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The Atlantic Division of Suncoast Food Centers reportedthe following results for the most recent period:

Compute Atlantic Division’s economic value added.

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(9% × (1 – 30%) × \$40,000,000) + (12% × \$60,000,000)

= 0.0972

\$40,000,000 + \$60,000,000

First, let’s compute theweighted-average cost of capital

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\$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

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