Adjusted Earnings 1. S'NeW Technologies, Inc, reported EBIT (earnings before interest and taxes) of S100 million in the most recent financial year (the "current year"). 2. The book value of equity was $800 million and the book value of debt was $200 million. 3. The debt is in the form of 10-year bank loans with a balloon payment. (All the principal is due at the end of the 10th year). The interest expense in the current year was $16 million. 4. The firm has the following onerating lease commitments for the next few years: 5. The firm is not rated, but you believe that it would be rated using criteria based upon smaller and riskier firms. The table summarizing interest coverage ratios and ratings for such companies is provided below. 6. The firm reported $90 million in R\& D expenses in the current year. You estimate that there is a 3-year amortizable life for research, and so you have collected R\&D expenses for the last 3 years: 7. The unlevered beta for comparable firms is 1.25. 8. The firm has 50 million shares outstanding, trading at $10 per share. 9. The 10 -year Treasury bond rate is 2%. The market risk premium is 6%. The marginal tax rate is 40%. Questions 1. Estimate the value of the research asset. 2. Estimate the operating income with the operating lease and R\&D adjustments (before taxes). 3. Estimate the operating income with the operating lease and R\&D adjustments (after taxes). 4. Estimate the book values of equity and debt with the operating lease and R\&D adjustments. 5. Estimate the adjusted after-tax return on capital for this firm and contrast to the unadjusted number