Economic value Added TLEVA) Economic Value Added (EVA) is similar to residual income in that income is compared to the cost of investment used to earn that income. However, there are some key differences. EVA uses: net (after- tax) income, and the true cost of capital (or investment) rather than some predetermined hurdle rate. If net income is than the cost of capital, the company is said to be creating wealth. If net income is than the cost of capital, the company is said to be destroying wealth Example: Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after-tax income of $768,000. Fill in the following table to calculate the weighted average percent cost of capital. (Round all decimals to four significant digits.) Amount Percent After-Tax Cost Weighted Cost $3,000,000 3 Mortgage bonds 2,500,000 4.8 Unsecured bonds Common stock 4,500,000 Total The weighted average percent cost of capital is or %. Total cost of capital employed is $ percent interest, $2.5 million of unsecured bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after-tax income of $768,000. Fill in the following table to calculate the weighted average percent cost of capital. (Round all decimals to four significant digits.) Amount Percent After-Tax Cost Weighted Cost 3 Mortgage bonds Unsecured bonds $3,000,000 2,500,000 4,500,000 4.8 Common stock Total The weighted average percent cost of capital is or %. Total cost of capital employed is NA EVA is $