CarKing is a company in the luxury car industry. To verify its performance, the company is using
Question:
CarKing is a company in the luxury car industry. To verify its performance, the company is using economic value added (EVA), a managerial technique. The EVA for the company has been calculated as $202,545. This amount has been determined with the following information.
Marginal tax rate.............................................................35%
Cos of debt before tax...................................................11%
Cost of equity................................................................13.5%
Costs capitalized for Development................................25%
Costs capitalized for Research.......................................30%
Amortization period...................................................6 years
Operating Income..................................................$445,808
Capital Employed................................................$1,950,000
Total Development Cost........................................$80,000
Total Research Cos...............................................$120,000
Goodwill impairment loss included in income ...$36,500
REQUIRED:
a) Assume that R&D costs for the year occurred on Jan 1. What is the capital structure of Car King?
b) What would be the new EVA amount if capital structure of the company is 70% debt and 30% equity?
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young