Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster carned operating income of $194,000 after income taxes. Capital employed equated $2.9 million Brewster 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 risky investment and probably commands 12-point premium above the 5 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 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. $ 76,280 x 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. EVA 53,080 X Year 1 $ Year 2 $ 18,280 X 3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 70 percent of total financing. Total capital employed would be $4,000,000. The new after-tax operating income would be $385,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials 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 long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.) Previous Next Check My Work 1 more Check My Work uses remaining, 76,280 x 2. Sugar will be used to replace another natural ingredient (minumber 13) in the elderberry wine. This should not affects but will begin to affect the market assessment of Brewster Company, orging the remove term Treasury bills to 10 percent the first year and 7 percent the end you Calculate revised EVA for both years EVA Year 15 53.000 x Year 25 18,250 X 3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 70 percent of total financing. Total capital employed would be $4,000,000. The new after-tax operating income would be $385.000 Using the original data, calculate EVA. Then, recalculate EVA assuming the materials 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 long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.) EVA Year 1 $ 85,400 X Year 1 (10% premium) 5 56 X $ Year 2 (7% premium) 1,400 X Feedback Check My Wor 1. After-tax cost = Interest rate - (Tax rate x Interest Rate). EVA = After-tax operating income - (Weighted average cost of capital x Total capital employed) 2. Calculate the EVA for both years with the new information 3. See Cornerstone 10.3. Previous Next Check My Work 1 more Check My Work uses remaining. Save and Exit Submit Assignment for Grading All work saved Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster carned operating income of $194,000 after income taxes. Capital employed equated $2.9 million Brewster 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 risky investment and probably commands 12-point premium above the 5 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 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. $ 76,280 x 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. EVA 53,080 X Year 1 $ Year 2 $ 18,280 X 3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 70 percent of total financing. Total capital employed would be $4,000,000. The new after-tax operating income would be $385,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials 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 long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.) Previous Next Check My Work 1 more Check My Work uses remaining, 76,280 x 2. Sugar will be used to replace another natural ingredient (minumber 13) in the elderberry wine. This should not affects but will begin to affect the market assessment of Brewster Company, orging the remove term Treasury bills to 10 percent the first year and 7 percent the end you Calculate revised EVA for both years EVA Year 15 53.000 x Year 25 18,250 X 3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 70 percent of total financing. Total capital employed would be $4,000,000. The new after-tax operating income would be $385.000 Using the original data, calculate EVA. Then, recalculate EVA assuming the materials 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 long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.) EVA Year 1 $ 85,400 X Year 1 (10% premium) 5 56 X $ Year 2 (7% premium) 1,400 X Feedback Check My Wor 1. After-tax cost = Interest rate - (Tax rate x Interest Rate). EVA = After-tax operating income - (Weighted average cost of capital x Total capital employed) 2. Calculate the EVA for both years with the new information 3. See Cornerstone 10.3. Previous Next Check My Work 1 more Check My Work uses remaining. Save and Exit Submit Assignment for Grading All work saved