4

Brewster Company manufactures elderberry wine, Last year, Brewster earned operating income of $186,000 after income taxes. Capital emplayed equaled $2.7 miition; Brewster is 40 percent equity and 60 percent 10 -year bonds paying 7 percent interest. Brewster's marginal tax rate is 40 percent. The company is considered a fairly ris investment and probably commands a 12-point premium above the 4 percent rate on long-term Treasury bonds. Jonathan Brewster's aunts, Abby and Martha, have just retired, and Brewster is the new CEO of Brewster Company. He would like to improve EVA for the company. Compute EVA under each of the following independent scenarios that Brewster is considering. Required: Use a spreadsheet to perform your calculations and round all interim and percentage flgures to four decimal places, If the EVA is negative, enter your answer as a negative amount. 1. No changes are made; calculate EVA using the original data. 2. Suger will be used to reploce another natural ingredient (atomic number 33) in the elderberry wine. This should not affect costs but will begin to affect the market assessment of Brewster Comparw, bringing the premium abowe long-term Treasury bills to 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years. 3. Brewster is coisidering expanding but needs additional cepital. The company could borrow money, but if is considering selling more common stock, which would increase equity to 70 percent of total financing. Total capitat employed would be $4,000,000. The new aftentax operating income would bet $330,000. Using the ofiginal dota, caiculate EVA, Then, recolculate EVA assuming the materials substitution described in Requirement 2 , New after-tax income will be s3sto, ood, and in Year 1, the premium will be 10 percent above the long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Theasury rate. (Hintt You will calculate three EVAs for this requirement.) 6 more Check My Work uses remaining for both years. for thit requirement.) 6 more Check My Wouk uset rimaining