Oscar Lewitt, CEO of Ingram Corporation, had just read in a recent issue of Fortune magazine an article entitled “America’s Wealth Creators” and noticed several names of corporations he was familiar with, such as Microsoft, General Electric, Intel, Walmart, Coca-Cola, Merck, and Pfizer. These top wealth creators were listed in terms of their market value added (MVA) and economic value added (EVA). Although he knew that some of the MVA and EVA were in the billions of dollars, he noticed in the article two other numbers, return on capital and cost of capital. He felt that if these corporations, despite their size, were able to figure out how much value they were adding to the wealth of their shareholders, it would be possible to calculate the EVA for Ingram Corporation.

At his next management committee meeting, Mr. Lewitt asked his controller to calculate the EVA for Ingram Corporation and to report the information to the management committee at their next meeting for discussion purposes. After some research about this new financial technique, the controller knew that he had to refer to his financial statements to calculate the EVA. He had to draw several numbers from the statement of income and the statement of financial position to determine the cost of capital and ROA. The company’s most recent statement of income and different sources of financing are shown below:

Ingram Corporation

Statement of Income

For the year ended December 31, 2014

Revenue …………………………………………      $1,200,000

Cost of sales …………………………………….        (650,000)

Gross profit ……………………………………..        550,000

Expenses 

Distribution costs ……………………………….       (150,000)

Administrative expenses ………………………..        (125,000)

Depreciation ……………………………………        (50,000)

Finance costs …………………………………..  (45,000)

Total expenses …………………………………  (370,000)

Profit before taxes ……………………………..        180,000

Income tax expense ……………………………  (67,500)

Profit for the year ……………………………...   $ 112,500

The company’s three major sources of financing are from short-term lenders for $100,000, a mortgage for $325,000, and equity for $430,000. The equity portion was split between share capital of $130,000 and retained earnings of $300,000.

The cost of capital for these three sources of financing is as follows:

• Equity ……………………………………….............12.0%

• Short-term borrowings ……………………….. 8.0%

• Long-term borrowings ……………………….. 7.0%

1. Calculate Ingram Corporation’s EVA.

2. Comment on the EVA. How could EVA be improved?