Hoping someone could help me with this problem from Ninja. What I don't understand is the WACC calculation in the answer. Why aren't they using WACC = 50% * 15% + 50% * 5% * (1-40%) ? Why not add the (1-T) ?
Pretax operating profit: $300,000,000
Tax rate: 40%
Capital used to generate profits 50% debt, 50% equity: $1,200,000,000
Cost of equity: 15%
Cost of debt: 5%
What is the EVA?
Answer
The economic value added amount (EVA) is calculated by multiplying the capital employed at the beginning of the period by the difference between the return on capital employed (RCOE) and the weighted average cost of capital (WACC). Since a company is worth its book value if the RCOE is equal to its WACC, the positive difference between the two would be the percentage by which the value of the business is increased.
EVA is the income earned in excess of the normal rate of return represented by the WACC. Since the debt and equity proportions are each 50%, the WACC is 10% ((15% + 5%) ÷ 2).
Capital $1,200,000,000
WACC x 0.10
Normal return $ 120,000,000
Net income after tax ($300,000,000 x 0.60) 180,000,000
EVA ($180,000,000 – $120,000,000) $ 60,000,000
.