At the end of 2011 Home Depot's total capitalization amounted to $29,031 million. In 2012 debt investors received interest income of $648 million. Net income to shareholders was $4,487 million. (Assume a tax rate of 35%.) Calculate the economic value added assuming its cost of capital is 10%. (Do not round intermediate calculations. Give your answer in millions rounded to 2 decimal places.)
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2011 Home Depot's total capitalization
Full Answer Section
Sample Answer
Here's how to calculate the Economic Value Added (EVA) for Home Depot:
1. Calculate After-Tax Operating Profit (NOPAT):
- Interest Expense (Pre-tax): $648 million
- Tax Rate: 35%
- Tax Shield on Interest: $648 million * 0.35 = $226.8 million
- Net Income: $4,487 million
To get to NOPAT, we need to add back the after-tax interest expense to net income. Since net income is after tax and after interest, adding back the after-tax interest expense effectively reverses the deduction of interest for tax purposes.
- NOPAT = Net Income + Interest Expense * (1 - Tax Rate)
- NOPAT = $4,487 million + $648 million * (1 - 0.35)
- NOPAT = $4,487 million + $648 million * 0.65
- NOPAT = $4,487 million + $421.2 million
- NOPAT = $4,908.2 million
2. Calculate Capital Charge:
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Total Capitalization: $29,031 million
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Cost of Capital: 10%
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Capital Charge = Total Capitalization * Cost of Capital
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Capital Charge = $29,031 million * 0.10
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Capital Charge = $2,903.1 million
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