Certified Valuation Analyst (CVA) Practice Exam

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In Geri Co, what are the after-tax economic earnings based on a tax rate of 28% for the 5-year weighted average pretax earnings of $1,250,000?

$900,000
$1,250,000
$900,500
$1,250,750

The correct answer is: $900,000

To calculate the after-tax economic earnings, one must first determine the taxation impact on the pretax earnings. In this case, the pretax earnings are reported as $1,250,000, and the applicable tax rate is 28%. The formula to convert pretax earnings to after-tax earnings is: After-tax earnings = Pretax earnings × (1 - Tax rate) Plugging in the provided values: After-tax earnings = $1,250,000 × (1 - 0.28) First, calculate (1 - 0.28), which equals 0.72. Then multiply: After-tax earnings = $1,250,000 × 0.72 After performing the multiplication: After-tax earnings = $900,000. This calculation shows that the after-tax economic earnings for Geri Co, when factoring in the 28% tax rate applied to the pretax earnings of $1,250,000, indeed equate to $900,000. This result confirms that the answer provided aligns with the calculated after-tax earnings, demonstrating a clear understanding of how to apply taxation to evaluate economic earnings.