Brewster Company manufactures eldeberry wine. Last year, Brewster earned operating income of $195,000 after income taxes. Capital employed equaled $2.4 million. Brewster is 45% equity and 55% 10-year bonds paying 7% interest. Brewster's marginal tax rate is 40%. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5% 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. 1. No changes are made; calculate EVA using the original data.

Brewster Company manufactures eldeberry wine. Last year, Brewster earned operating income of $195,000 after income taxes. Capital employed equaled $2.4 million. Brewster is 45% equity and 55% 10-year bonds paying 7% interest. Brewster's marginal tax rate is 40%. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5% 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. 1. No changes are made; calculate EVA using the original data.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be relatively risky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays a marginal tax rate of 30 percent. (Round all ratios to four significant digits) 1. Calculate the after-tax cost of each method of financing. 2. Calculate the weighted average cost of capital for Ignacio, Inc. Calculate the total dollar amount of capital. Then Calculate economic value added (EVA for Ignacio, Inc. for last year. Is the company creating or destroying wealth? 3. What if Ignacio, Inc. had common stock which was less risky than other stocks and commanded a risk premium of 5 percent? How would that affect the weighted average cost of capital? How would it affect…
Brewster Company manufactures eldeberry wine. Last year, Brewster earned operating income of $195,000 after income taxes. Capital employed equaled $2.4 million. Brewster is 45% equity and 55% 10-year bonds paying 7% interest. Brewster's marginal tax rate is 40%. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5% 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. 1. 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 11 percent the first year and 8 percent the second year. Calculate revised EVA for both…
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Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $195,000 after income taxes. Capital employed equaled $2.4 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 13-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 each of the following independent scenarios that Brewster is considering. 1. 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 $3,800,000. The new after-tax operating income would be $400,000.…
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