Chapter 4-4 At the end of 2011 Home Depot’s total capitalization amounted to $28

Question

Chapter 4-4

At the end of 2011 Home Depot’s total capitalization amounted to $28,986 million. In 2012 debt investors received interest income of $633 million. Net income to shareholders was $4,532 million. (Assume a tax rate of 35%.)

Calculate the economic value added assuming its cost of capital is 10%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

At the end of 2011 Home Depot’s total capitalization amounted to $28,986 million. In 2012 debt investors received interest income of $633 million. Net income to shareholders was $4,532 million. (Assume a tax rate of 35%.)

Explanation / Answer

economic value added = Net operating income after tax - [Capital invested * Cost of Capital/WACC]

Net operating income after tax = Net income to shareholders = $4,532 million

So, economic value added = $4,532 million - [$28,986 million * 0.10]

= 4532 million - 2898.60 million = $1633.40 million

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