Valley Commercial Bank has a criterion to loan only to companies that have an economic value added greater than zero for the past year and for the past three years, on average. Answer the following questions.

a. The bank is considering loaning money to a small company that has the following economic characteristics.

Does this company meet the bank’s criterion for a positive economic value added?

Average operating income before tax for the last three years equals $1,500,000 per year.

The tax rate equals 35 percent for all three years.

The appropriate weighted-average cost of capital equals 15 percent, which is applicable to all three years.

™ The average total assets over the past three years equal $7,000,000.

The average current liabilities over the past three years equal $1,000,000.

b. You work as a loan officer for VCB. A prospective borrower who just graduated from college has come to you for advice. Because her father had been seriously injured in an automobile accident, she is now running the family business, which is a small winery. She wants to borrow money from VCB to buy some wine-processing equipment that will make the company more efficient. The winery had been profitable in the past, but at this point, its economic value added, according to VCB’s calculations, is $(120,000) for a company that has revenue of $6,000,000 and total assets of

$4,000,000. Ordinarily, the bank will not loan her the money to buy the new equipment. Assume the same cost of capital and tax rates as in part (a). What do you advise?

c. BUILD YOUR SOPWNR EADSHEET. Build an Excel spreadsheet to solve requirement (a).