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Calculating EVA

Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income $of$ $$192,000$ after income taxes. Capital employed equaled $$2\mathrm{.}6$ million. Brewster $is40$ percent equity and $60$ percent $10-$year bonds paying $7$ percent interest. Brewster's marginal tax rate $is40$ percent. The company $is$ considered a fairly risky investment and probably commands $a12-$point premium above the $4$ 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 each $of$ the following independent scenarios that Brewster $is$ considering.

Required:

Use a spreadsheet $to$ perform your calculations and round all interim and percentage figures $to$ four decimal places. $If$ the EVA $is$ negative, enter your answer $as$ a negative amount.

$1.No$ changes are made; calculate EVA using the original data.

$ fill $in$ the blank $1$

$2.$ 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 $to10$ percent the first year and $7$ percent the second year. Calculate revised EVA for both years.

EVA

Year $1$ $ fill $in$ the blank $2$

Year $2$ $ fill $in$ the blank $3$

$3.$ Brewster $is$ considering expanding but needs additional capital. The company could borrow money, but $itis$ considering selling more common stock, which would increase equity $to70$ percent $of$ total financing. Total capital employed would $be$ $$3,000,000.$ The new after$-$tax operating income would $be$ $$385,000.$ Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described $in$ Requirement $2.$ New after$-$tax income will $be$ $$385,000,$ and $in$ Year $1,$ the premium will $be10$ percent above the long$-$term Treasury rate. $In$ Year $2,it$ will $be7$ percent above the long$-$term Treasury rate. $(Hint$: You will calculate three EVAs for this requirement.$)$

EVA

Year $1$ $ fill $in$ the blank $4$

Year $1(10\%$ premium$)$ $ fill $in$ the blank $5$

Year $2(7\%$ premium$)$ $ fill $in$ the blank $6$

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