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 years.
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 years.
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