able Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after-tax divisional come was $3,180,000 in year 3. he company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-tax ivisional income. Second, the company managers believe that advertising has a three-year positive effect on the sale of the company's products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 40 percent, 35 percent in year 2, and 25 percent in year 3. Advertising expenses in year 2 will be expensed 40 percent, 35 percent in year 3, and 25 percent in year 4. Advertising expenses in year 3 will be amortized 40 percent, 35 percent in year 4, and 25 percent in year 5. Third, namortized advertising expenses become part of the divisional investment in the EVA calculations. Media Division incurred advertising expenses of $572,000 in year 1 and $1,082,000 in year 2. It incurred $1,292,000 of advertising in year 3. Before considering the unamortized advertising, the Media Division had total assets of $29,400,000 and current liabilities of $3.760,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year. The company
able Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after-tax divisional come was $3,180,000 in year 3. he company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-tax ivisional income. Second, the company managers believe that advertising has a three-year positive effect on the sale of the company's products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 40 percent, 35 percent in year 2, and 25 percent in year 3. Advertising expenses in year 2 will be expensed 40 percent, 35 percent in year 3, and 25 percent in year 4. Advertising expenses in year 3 will be amortized 40 percent, 35 percent in year 4, and 25 percent in year 5. Third, namortized advertising expenses become part of the divisional investment in the EVA calculations. Media Division incurred advertising expenses of $572,000 in year 1 and $1,082,000 in year 2. It incurred $1,292,000 of advertising in year 3. Before considering the unamortized advertising, the Media Division had total assets of $29,400,000 and current liabilities of $3.760,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year. The company
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Gable Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after-tax divisional
income was $3,180,000 in year 3.
The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-tax
divisional income. Second, the company managers believe that advertising has a three-year positive effect on the sale of the
company's products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 40 percent, 35
percent in year 2, and 25 percent in year 3. Advertising expenses in year 2 will be expensed 40 percent, 35 percent in year 3, and 25
percent in year 4. Advertising expenses in year 3 will be amortized 40 percent, 35 percent in year 4, and 25 percent in year 5. Third,
unamortized advertising expenses become part of the divisional investment in the EVA calculations. Media Division incurred
advertising expenses of $572,000 in year 1 and $1,082,000 in year 2. It incurred $1,292,000 of advertising in year 3.
Before considering the unamortized advertising, the Media Division had total assets of $29,400,000 and current liabilities of
$3,760,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year. The company
uses a 14 percent cost of capital to compute EVA.
Required:
Compute the EVA for the Media Division for year 3.
Is the division adding value to shareholders?
Complete this question by entering your answers in the tabs below.
Required 1
Required 2
Compute the EVA for the Media Division for year 3.
Note: Negative amounts should be indicated by a minus sign.
Adjusted divisional income
Cost of adjusted divisional investment
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