ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques
Marlow plc has post-tax operating profit of $12.0m, capital employed of $80m and a WACC of 10%. Its board is judging a divisional manager's performance using EVA. What is the division's EVA?
EVA is $4.0m. The capital charge is $80m multiplied by 10%, which gives $8.0m, and this is deducted from post-tax operating profit of $12.0m. The positive result shows the division earns more than the return required by capital providers.
- A$4.0mCorrect
- B$12.0m
- C$8.0m
- D$20.0m
Explanation
Capital charge = $80m x 10% = $8.0m. EVA = $12.0m - $8.0m = $4.0m. Choosing $12.0m ignores the capital charge, and $20.0m wrongly adds the charge instead of deducting it.
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