Sperry Space and Aeronautics is a research and development firm that contracts with the government to design
Question:
Sperry Space and Aeronautics is a research and development firm that contracts with the government to design specialized equipment for use in the NASA space shuttle program. Its income statements and year-end balance sheets for 2011 and 2012 are shown below. The board of directors for Sperry recently installed a new key performance measure for the company called Economic Value Added. Sperry's CEO worked with his management team to make the change in 2012. Based on the EVA® results, the CEO was concerned when he presented the financial report for 2012 at the first board meeting following the end of the year. As he began the presentation, he was just glad that Sperry was showing much better profit in 2012 than it had in 2011. His relief, however, was short lived when the head of the finance committee on the board pointed out that EVA® loss in 2012 was actually more than the EVA® loss in 2011. Why was it that operating income was improving, but EVA® was getting worse?
Required:
1. Compute the Economic Value Added for 2011 and 2012. Sperry's average tax rate is 45% and remained the same in both years. On the other hand, due to an increase in equity funding, the weighted average cost of capital increased from 10% in 2011 to 11% in 2012.
2. Explain why EVA® is getting worse in 2012 despite the fact that operating income ishigher.
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain