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Economic Value Added

Leesum Company has two divisions: the Leone Division and the Letwo Division. The following information pertains to last year's results:

Line Item Description Leone Division Letwo Division

Net $($after$-$tax$)$ income $$707,850$ $$315,000$

Total capital employed $4,760,0003,640,000$

Leesum's actual cost of capital was $15\%.$

Required:

$1.$ Calculate the EVA for the Leone Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign.

fill in the blank $1$ of $1$$

$2.$ Calculate the EVA for the Letwo Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign.

fill in the blank $1$ of $1$$

$3.$ Conceptual Connection: Is each division creating or destroying wealth?

Leone Division

Letwo Division

$4.$ Describe generally the types of actions that Leesum's management team could take to increase Letwo Division's EVA?

a$.$ Increase the after$-$tax operating profit that is generated from using the same amount of invested capital.

b$.$ Continue to generate the same after$-$tax operating profit but use less capital to do so$.$

c$.$ Continue to generate the same after$-$tax operating profit using the same amount of capital, but with a lower cost of capital.

d$.$ Decrease the after$-$tax operating profit that is generated from using the same amount of invested capital.

e$.$ Continue to generate the same after$-$tax operating profit but use more capital to do so$.$

The management team

use data analysis to see what is leading to declining EVA and use that information.