[Anonymous]

NINJA Question –

Zig Corp. provides the following information:

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 of the following represents Zig’s year-end economic value added amount?

A.

$0

B.

$60,000,000

C.

$120,000,000

D.

$180,000,000

I got B, using this formula from Ninja notes in BEC

EVA = Operating Income (after tax) – (Net Assets x Weighted Avg. Cost of Capital)

here is the explanation ninja mcq gives for letter D being correct:

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.

The return on capital employed (RCOE) is a way of measuring the efficiency with which a company is using its capital to generate revenue. RCOE is the pretax operating profit divided by the capital employed. For Zig Corp, this would be 0.25, or 25% ($300,000,000 ÷ $1,200,000,000).

The weighted average cost of capital is the weighted average of the cost of debt and the various equity components of the firm’s capital structure. For Zig Corp, this weighted average is the sum of the two costs provided in the question, or 20% (15% + 5%).

RCOE = 300/1200 = 0.25, or 25%

WACC = (Kdebt x Wt.debt) + (Kequity x Wt.equity)

= (0.50 x 0.05) + (0.50 x 0.15)

= .025 + .075 = .100

EVA % = 0.25 – 0.10 = 0.15

EVA = 0.15 x $1.2 billion = $180 million

The tax rate is not pertinent information in this problem.

I guess im confused about the “rcoe” why is that not in the formula in the ninja notes, and better question, why is this question the first ive ever heard of this????

[Anonymous]

bump

[Mrsterrell]

I just worked this same problem in the Becker software and the answer was B and I solved it using the EVA Formula: Income after taxes – (Investment x WACC)

[Anonymous]

So, Ninja MCQ has the wrong answer as being correct??? And gives some off the wall explanation???

[Author]

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