Certified Valuation Analyst (CVA) Practice Exam

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.