Computing Economic Value Added Jessica began a day care business three years ago and has worked hard to make it successful.

She originally invested $4,000 of her own money and borrowed $5,000 from the bank to start her business. She has two employees and pays herself a management salary. She hopes to make a return on her $4,000 investment. With some help from her financial advisor, she determined that her expected rate of return on her investment combined with the rate of interest on her bank loan results in a weighted average cost of capital of 20%. The effective income tax rate on her business is 25%. She had $5,600 in operating income before interest and taxes this year.

Her financial advisor helped her draw up the following balance sheet at the end of the year:

Compute the Economic Value Added (EVA®) for Jessi’s Day Care.

Transcribed Image Text:

Jessi's Day Care Year-End Balance Sheet Cash Supplies Accounts receivable $ 1,000 Wages payable 800 350 Bank loan.... 5,000 850 Total liabilities $ 5,800 Total current assets $ 2,200 Capital contribution 4,000 Equipment Total assets 8,600 $10,800 Retained earnings 1,000 Total liabilities and equity $10,800