Question
BCOM Ltd. summarised income statements for the past two years are shown below: 2020 (000) 2019 (000) operating profit 6500 5500 interest expense 1000 900
BCOM Ltd. summarised income statements for the past two years are shown below:
2020 (000) | 2019 (000) | |
operating profit | 6500 | 5500 |
interest expense | 1000 | 900 |
profit before tax | 5500 | 4600 |
tax at 25% | 1375 | 1150 |
net profit | 4125 | 3450 |
Further information is as follows:
1. The allowance for doubtful debts was 300,000 at 1 January 2019, 250,000 at 31 December 2019 and 350,000 at 31 December 2020.
2. Research and development costs of 500,000 were incurred during each of the years 2019 and 2020 on Project Z. These costs were expensed in the income statement, as they did not meet the requirements of financial reporting standards for capitalisation. Project Z is not complete yet.
3. At the end of 2018, the company had completed another research and development project, Project X. Total expenditure on this project had been 1,500,000, none of which had been capitalised in the financial statements. The product developed by Project X went on sale on 1 January 2019, and the product was a great success. The products life cycle was only two years, so no further sales of the product are expected after 31 December 2020.
4. The company incurred non-cash expenses of 15,000 in both years.
5. Capital employed (equity plus debt) per the statement of financial position was 33,500 at 1 January 2019, and 37,000 at 1 January 2020. Page 1 of 5
6. The pre - tax cost of debt was 5% in each year. The estimated cost of equity was 12% in 2019 and 14% in 2020. The rate of corporate income tax was 25% during both years.
7. The companys capital structure was 60% equity and 40% debt.
8. There was no provision for deferred tax. Required
Calculate Economic Value Added (EVA) in 2020 and 2019. ( 12 marks)
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