Economic value added
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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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Economic Value Added

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Economic value added

Economic Value Added

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

13-1


Economic value added1

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


Economic value added2

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


Economic value added3

(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


Economic value added4

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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