Springfield Corporation,whose Tax Rate Is 40%,has Two Sources of Funds

question 6

Multiple Choice

Springfield Corporation,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate of 8%,and equity capital with a market value of $12,000,000 and a cost of equity of 12%.Springfield has two operating divisions,the Blue division and the Gold division,with the following financial measures for the current year:
$\begin{array}{|l|l|l|l|}\hline & \text {Total Assets} &\text { Current Liabilities} & \text {Operating Income} \\\hline\text { Blue Div. }&\$ 9,500,000 & \$ 2,800,000& \$ 1,055,000 \\\hline \text {Gold Div.} & \$ 11,000,000 & \$ 2,200,000 & \$ 1,200,000 \\\hline\end{array}$
What is Economic Value Added (EVA) for the Blue Division?

• A) -$233,400
• B) $21,960
• C) $188,600
• D) $433,960

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Definitions:

Lower Control Limit

A statistical measure below which a process is considered to be out of control and requires adjustment.

Proportion

Represents a fraction or percentage that indicates the part of a whole.

Defective Units

are items produced that do not meet the quality standards set by the manufacturer or industry.

Assignable Cause Variation

Variation in a process that can be traced to specific, identifiable sources, often signaling issues that need correction.