Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned an operating income of $193,000 after income taxes. Capital employed equaled $2.2 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 7 percent interest. Brewster's marginal tax rate is 40 percent.
The company is considered a fairly risky 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 like to improve EVA for the company.
Compute EVA under the following scenarios that Brewster is considering.
Required: Use a spreadsheet to perform your calculations. If the EVA is negative, enter your answer as a negative amount.
1). No changes are made; calculate EVA using the original data. $.
2). Sugar will be used to replace another natural ingredient (atomic number 33) in the elderberry wine. This should not affect costs but will begin to affect the market assessment of Brewster Company, bringing the premium above long-term Treasury bills to 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years.
EVA
Year 1$
Year 2$