The Holt Company uses EVA to evaluate top management performance. In 20X8, Holt had net operating income

Question:

The Holt Company uses EVA to evaluate top management performance. In 20X8, Holt had net operating income of $8,210 million, income taxes of $1,395 million, and average noncurrent liabilities plus stockholders’ equity of $27,555 million. The company’s capital is about 55% long-term debt and 45% equity. Assume that the after-tax cost of debt is 10% and the cost of equity is 12%.

1. Compute Holt’s EVA. Assume definitions of after-tax operating income and invested capital as reported in Holt’s annual reports without adjustments advocated by Stern Stewart.

2. Explain what EVA tells you about the performance of the top management of Holt in 20X8.

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...