Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $192,000 after income taxes. Gapital employed equaled $2,6 million. Brewster is 40 percent equity and 60 percent 10 -year bonds paying 7 percent interest. Brawster's marginat tax rate is 40 percent. The company 15 considered a fairly risky investment and probably commands a 12pointpremium aboye the 5 percent rate on long-term Treasury bpnds. Jonathan Brewster's aunts, Abby and Martha, have just fetired, and Brewster is the new CEO of Brewster Cormpany, He would ilke 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 figures 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. Sugar will be used to replace 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 Company, bringing the premium above 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 considering expanding but needs additional capital. The company could borrow money, butit is considering setling more common stock, which would increase equity to 70 percent of total financing. Total capital employed would be $3,200,000. The new after-tax operating incorre would be $385,000, Using the original data, calculate EvA. Then, recaiculate EvA assuming the materials 5ubstitution described in Requirement 2. New after-tax income will be $385,000, and in Year 1, the premium will be 10 percent above the long-terii Treasury rate. In Year 2 , it will be 7 percent above the long-tem Treasury rate. (Hint: You will calculate three EvAs for this) Jonathan Brewster's aunts, Abby and Martha, have just retired, and Brewster is the new CEO of Brewster comparhy. He would ike to im prove EVA for the corrpany. 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 figures 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. Sugar will be used to replace 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 Company, bringing the premium above long-term Treasurv bills to 10 percent the first year and 7 percent 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 coniidering seling more cormmon stock, which would increase equity to 70 percent of total financing. Total capital employed would be $3,200,000, The new after-tax operating income would be $385,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materiais substitution described in Requirement 2. New after-tax income will be $385,000, and in Year 1 , the premium will be 10 percent above the lond-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVhs for this requirement.)
