Selected data for a company for 20x0 are as follows:

Beginning stockholders equity.............. $5,000

Income before restructuring costs............. 1,000

At the end of 20x0, the company considers a major restructuring. Given the nature of the restructuring, the company has the flexibility to recognize the $300 restructuring cost either:

1. As a $300 expense in 20x0, or
2. As expenses of $150 in 20x1, $100 in 20x2, and $50 in 20x3.

Under the first alternative, net income will be $700 and ending stockholders equity will be $5,700. Under the second alternative, net income will be $1,000 and ending stockholders equity will be $6,000.

1. Show that the EVA (abnormal earnings) valuation model is immune to the choice of accounting recognition methods. Assume that the valuation is made at the end of 20x0 and
   • Income before restructuring costs will grow by $50 in each of the next three years.
   • No dividends are paid.
   • The cost of equity capital is 10%.
2. Now assume that the valuation is made as of the beginning of 20x0 and the firm is already aware of its restructuring choices. Beginning book value of stockholders equity is $5,000 in both cases. However, 20x0 income differs with the accounting choice.
   1. Discuss whether EVAs (abnormal earnings) differ for years 20x1, 20x2, and 20x3.
   2. Show that the EVA valuation as of the beginning of 20x0 is also immune to the choice of recognition methods.