Question

These assets are expected to generate a pre-tax operating profit of $10 million next year5. The acquisition of assets worth $100 million. These assets are expected to generate a pre-tax operating profit of $20 million next year Show how each of these decisions would improve SCC's expected pre-tax economic value added.
The Southern Communication Corporation (SCC) has $1 billion of capital invested in several telecommunication projects that are expected to generate a pre-tax operating profit of $170 million next year. SCC has an estimated pre-tax cost of capital of 15 percent.
a. What is the pre-tax economic value added (EVA) that SCC is expected to generate next year? Calculate EVA first based on pre-tax operating profit and then based on expected return on invested capital.
b. SCC is considering five possible actions that should improve its expected pre tax EVA. These are as follows:
1. A $10 million reduction in operating expenses that should not affect revenues
2. A $60 million reduction in invested capital that should not affect operating profit
3. A reexamination of its capital structure (debt-to-equity ratio) that could lower its pre-tax cost of capital to 14 percent
4. The sale of assets at their book value of $100 million. These assets are expected to generate a pre-tax operating profit of $10 million next year
5. The acquisition of assets worth $100 million. These assets are expected to generate a pre-tax operating profit of $20 million next year Show how each of these decisions would improve SCC's expected pre-tax economic value added.


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  • CreatedMarch 27, 2015
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