The following information is available for Beth Company: Current assets $100,000
ID: 2797360 • Letter: T
Question
The following information is available for Beth Company:
Current assets
$100,000
Current liabilities
$75,000
Property, plant and
Long-term liabilities
100,000
equipment
50,000
Stockholders' equity
125,000
Other assets
150,000
Total liabilities and
Total assets
$300,000
stockholders' equity
$300,000
Invested capital is defined as total assets. Before-tax operating profit is $175,000. After-tax operating profit is $125,000. The after-tax cost of capital is 10%.
A. Compute the economic profit.
B. Explain in a paragraph the logical steps used to calculate economic profit.
Current assets
$100,000
Current liabilities
$75,000
Property, plant and
Long-term liabilities
100,000
equipment
50,000
Stockholders' equity
125,000
Other assets
150,000
Total liabilities and
Total assets
$300,000
stockholders' equity
$300,000
Explanation / Answer
A) Economic Profit = Net Operating Profit After Tax - (Capital Invested x WACC) Net Operating Profit After Tax 125000 WACC 10.00% Capital Invested = Total Assets 300000 Economic Profit = 125000 - (300000 x 10%) $95,000.00 B) Economic profit is also referred to as economic value added (EVA).It is calculated as: Economic Profit = Net Operating Profit After Tax - (Capital Invested x WACC) There are three components required to solve economic profit: net operating profit after tax (NOPAT), invested capital, and the weighted average cost of capital (WACC). Net operating profit after tax (NOPAT) amount can be found in income statement WACC can be calculated using market value of different source of capital and their respective cost of capital, Invested capital is calculated subtracting non interest bearing current liabilities from the total assets.
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