Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $210,000 after income taxes. Capital
Question:
(Use a spreadsheet to perform your calculations.)
Required:
1. No changes are made; calculate EVA using the original data.
2. Sugar will be used to replace another natural ingredient (arsenic) 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 9 percent the first year and 6 percent the second year. Calculate revised EVA for both years.
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 80 percent of total financing. Total capital employed would be $5,000,000. The new after-tax operating income would be $750,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New yearly after-tax income will be $750,000. In Year 1, the premium will be 9 percent above the long-term Treasury rate. In Year 2, it will be 6 percent above the long-term Treasury rate.
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Related Book For
Cost Management Accounting and Control
ISBN: 978-0324559675
6th Edition
Authors: Don R. Hansen, Maryanne M. Mowen, Liming Guan
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