Brewster Company manufactures elderberry wine. Last year Brewster earned an operating profit of $210,000 after taxes. Capital employed equaled $2 million. Brewster is 50% equity

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Brewster Company manufactures elderberry wine. Last year Brewster earned an operating profit of $210,000 after taxes. Capital employed equaled $2 million. Brewster is 50% equity and 50% ten-year bonds paying 6% interest. Brewster's marginal tax rate is 35%. The com¬

pany is considered a fairly risky investment and probably commands a 12 point premium above the 6% rate on long-term treasury bonds.

Mortimer Brewster's aunts, Abby and Martha, have just retired, and Mortimer is the new CEO of Brewster Company. He would like to improve EVA for the company. Com¬

pute EVA under each of the following independent scenarios that Mortimer is considering.

(Use a spreadsheet to perform your calculations.)

Required:

1. No changes are made; calculate EVA using the original data.

2. Sugar will be used to replace another natural ingredient (arsenic) in the elderberry wine.

This should not affect costs but will begin to affect the market assessment of Brewster Company, bringing the premium above long-term treasury bills to 9% the first year and 6% the second year. Calculate revised EVA for both years.

3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 80% of total financing. Total capital employed would be $3,000,000. The new after-tax operating income would be $450,000. Using the original data, calculate EVA.

Then recalculate EVA assuming the raw materials substitution described in Require¬

ment 2. New after-tax income will be $450,000, and in Year 1 the premium will be 9%

above the long-term treasury rate. In Year 2 it will be 6% above the long-term treasure rate. (Hint; you will calculate three EVAs for this requirement.)