The Coca-Cola Company uses economic value added (EVA) to evaluate top management performance. In 1996 Coca-Cola had net operating income of $3,915 million, income taxes of $1,104 million, and long-term debt plus shareholders’ equity of $8,755 million. The company’s capital is about 30 percent long-term debt and 70 percent equity. Assume that the after-tax cost of debt is 5 percent and the cost of equity is 12 percent.
1. Compute Coca-Cola’s economic value added (EVA).
2. Explain what EVA tells you about the performance of the top management of Coca-Cola in 1996.