ACCA Strategic Professional · Advanced Performance Management · Strategic management accounting
Zentra plc has net operating profit after tax (NOPAT) of $18.0m. Its capital employed is $120m and its weighted average cost of capital is 9%. Which figure is the company's economic value added (EVA)?
EVA is $7.2m. It is calculated as NOPAT of $18.0m less a capital charge of $10.8m, being 9% of $120m capital employed. A positive result shows the company earned more than the return required by its capital providers, so it created value.
- A$7.2mCorrect
- B$10.8m
- C$18.0m
- D$(7.2)m
Explanation
Capital charge = 9% x $120m = $10.8m. EVA = NOPAT $18.0m - $10.8m = $7.2m. The figure of $10.8m is wrong because it is the capital charge itself rather than the surplus after deducting it.
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