ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations
Vantor Inc has equity capital employed (book equity) of $500m, a cost of equity of 10% and earns profit after tax of $70m. Ignoring accounting adjustments, what is its economic value added (EVA-style residual income to equity) for the year?
Residual income to equity is $20m. The equity capital charge is 10% of $500m, which is $50m, and this is deducted from the profit after tax of $70m. A positive figure means the company earned more than shareholders required, so wealth was created.
- A$70m
- B$20mCorrect
- C$120m
- D$(20)m
Explanation
Residual income = profit after tax minus equity charge = 70 - (10% x 500 = 50) = $20m. Option A ignores the capital charge. Option D reverses the sign of the subtraction.
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