Case 4: EVA (6 points)

Because EVA is not a common financial statement, companies have the flexibility to calculate EVA as they choose. A multinational chemical company, headquartered in Germany, currently has a method where they calculate EVA based on the euro value of their total assets (What the company owns such as buildings, equipment inventory, etc.). Here is how they do it.

Step 1: Add the total euro value of their assets

Step 2: Multiply their total assets euro value by their WACC %

Step 3: Subtract the euro value, in point 2 above, from their operating income to get their EVA.

Given the information below, calculate their euro value EVA.

Asset value: 86M

Operating income: 8M

WACC: 10%

Recall from your text, and in the Simplifying EVA document, that an alternative way of calculating EVA uses a companys total capital structure as part of the EVA calculation. If we apply this approach, what would be their EVA in euro value if their capital structure was 90M, holding all other variables in question 1 constant?

What explanation can you think of that would justify using assets as a variable for calculating their cost of capital as opposed to their capital structure? Hint: you will not find this answer in your text; it is asked to engender your thinking.