If after-tax operating income is $185000, the weighted average cost of capital is 11%, total assets are $485000, and total liabilities are $367000, the economic value added is __________?
Show answer Hide answer
Answer: B. $172,020
Explanation
Economic value added is found by subtracting the total capital charge from after-tax operating income. The capital charge equals WACC multiplied by net capital, which is total assets minus total liabilities. This yields the correct remaining economic profit. Net capital is calculated as assets minus liabilities, representing the capital provided by investors. Multiplying this base by the cost of capital gives the required return for the period.
Companies use economic value added to measure true financial performance beyond standard accounting profits. It ensures that operations generate returns greater than the cost of financing the business assets. Incorrect options result from mathematical errors in computing net capital or misapplying the weighted average cost of capital percentage. Careful subtraction of liabilities from assets is essential before multiplying by WACC.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
Related questions
Q1. If the breakeven point is 200 units and fixed costs are $80000, the contribution margin per unit is __________?
Show answer Hide answer
Answer: A. $400
Contribution margin per unit equals total fixed costs divided by the break-even point in units. Dividing the total fixed costs of 80000 by the break-even point of 200 units yields 400. Cost-volume-profit analysis formula...
Q2. If allocated fixed overhead for actual output is $25000 and the production volume variance is $9000, the budgeted fixed overhead is _____________?
Show answer Hide answer
Answer: A. $34,000
Budgeted fixed overhead is calculated as the sum of allocated fixed overhead and production volume variance. Adding the allocated fixed overhead of 25000 and the volume variance of 9000 results in 34000. Standard overhea...
Q3. If budgeted sales are 2000 units, ending inventory is 3000 units, and beginning inventory is 1000 units, the budgeted production is ______________?
Show answer Hide answer
Answer: B. 4000 units
Budgeted production equals budgeted sales plus ending inventory minus beginning inventory quantities. Adding budgeted sales of 2000 to ending inventory of 3000 and subtracting 1000 gives 4000 units. Production budget for...
Q4. If starting work-in-process units are 2600, units started are 9000, ending work-in-process units are 2300, and completed good units are 8000, the total spoilage is ____________?
Show answer Hide answer
Answer: C. 1300 units
Total spoilage is calculated by carefully analyzing the physical units accounted for in production processes. Reconciling units started, completed, and in inventory reveals the exact quantity of spoiled units produced. P...
Q5. If the actual input price is $700, the budgeted input price is $400, and the actual input quantity is 50 units, the price variance is ___________?
Show answer Hide answer
Answer: A. $15,000
Price variance is calculated as the difference between actual and budgeted input prices multiplied by actual quantity. Subtracting the budgeted price of 400 from the actual price of 700 gives 300, which multiplied by 50...
Q6. If the actual input price is $500, the budgeted input price is $300, and the actual input quantity is 50 units, the price variance is __________?
Show answer Hide answer
Answer: D. $10,000
Price variance equals the difference between actual price and budgeted price multiplied by actual input quantity. Subtracting the budgeted price of 300 from the actual price of 500 gives 200, which multiplied by 50 equal...