- EX.10.10.ALGO
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Chapter 10 Homework
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $187,000 after income taxes. Capital employed equaled $2.5 million. 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 cursidered a fairly nisky investment and probably commands a 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 lice to improve EVA for the company. Compute EVA under each of the folowing 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 chances are made, calculate EVA using the original data $ -97,480 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 Breaster Company, bringing the premium above long-term Treasury bills tu 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years. EYA Year 1 $ -47,080 -47,080 X Year 2 $ 3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering saling more common stock, which would increase equity to 80 percent of total financing. Tatal capital employed would be $3,700,000. The new after-tax operating income would be $370,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $370,000, 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 10.18 x -10.18 x Year 1 (10% premium) $ Year 2 75premium) $ 10.18 Food Cho My Wak 1. To calculate EVA, first calculate the after-tax cost. After-tax cost - Interest rate - (Tex rete x Interest Rate), EVA -After-tax operating income - (Weighted average cost of capital x Total capital employed), 2. Consider revised information. To calculate EVA, first calculate the after-tax cost, Aner-tax cost - Interest rate - (Tex ratex Tnterest Rate). EVA - Aner-tex operating income - (Weighted average cost of capital * Total capital employed). 3. Consider revised information. To calculate EVA, Tirst calculate the after-tax cost. After-tax cost - Interest rate - (Tax rate x Tnterest Rate). EVA - After-tax aperating income -(Weighted average cost of capital x Total capital employed). Accounting numeric Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $187,000 after income taxes. Capital employed equaled $2.5 million. 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 cursidered a fairly nisky investment and probably commands a 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 lice to improve EVA for the company. Compute EVA under each of the folowing 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 chances are made, calculate EVA using the original data $ -97,480 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 Breaster Company, bringing the premium above long-term Treasury bills tu 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years. EYA Year 1 $ -47,080 -47,080 X Year 2 $ 3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering saling more common stock, which would increase equity to 80 percent of total financing. Tatal capital employed would be $3,700,000. The new after-tax operating income would be $370,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $370,000, 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 10.18 x -10.18 x Year 1 (10% premium) $ Year 2 75premium) $ 10.18 Food Cho My Wak 1. To calculate EVA, first calculate the after-tax cost. After-tax cost - Interest rate - (Tex rete x Interest Rate), EVA -After-tax operating income - (Weighted average cost of capital x Total capital employed), 2. Consider revised information. To calculate EVA, first calculate the after-tax cost, Aner-tax cost - Interest rate - (Tex ratex Tnterest Rate). EVA - Aner-tex operating income - (Weighted average cost of capital * Total capital employed). 3. Consider revised information. To calculate EVA, Tirst calculate the after-tax cost. After-tax cost - Interest rate - (Tax rate x Tnterest Rate). EVA - After-tax aperating income -(Weighted average cost of capital x Total capital employed). Accounting numeric
