Mythier plc, in its first year, produced profits after deduction of tax but before deduction of interest of 1m. The amount invested by debt holders was 4m. Equity holders also invested 4m. Interest paid during the year was 0.24m and the weighted average cost of capital is 8 per cent, while the cost of equity capital is 10 per cent.

a Calculate economic profit using the entity approach.

b Calculate economic profit using the equity approach.

c Describe the advantages of using economic profit in the modern corporation.

d Explain the difficulties with economic profit.