Doortune Company makes doorbells. It has a weighted-average cost of capital of 9%, and total assets of $5,880,000. Doortune has current liabilities of $950,000. Its operating income for the year was $645,000 Doortune does not have to pay any income taxes. One of the expenses for accounting purposes was a $110,000 advertising campaign run in early January. The entire amount was deducted this year, although the Doortune CEO believes the beneficial effects of this advertising will last 4 years GT Requirement 1. Calculate residual income, assuming Doortune defines investment as total assets. Begin by determining the formula, then enter the amounts and calculate the Rd for the year Measure of income 645,000 Imputed cost of investment 529.200 115,800 Requirement 2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming that for the purposes of economic value added t capitalized and amortized on a straight-line basis over 4 years. dded the advertising is Begin by determining the formula to calculate the EVA, then enter the amount and calculate the EVA for the year. (Enter the WACC as a decimal in the format X.XXX.) Adjusted operating inc. ( WACC *( Total assets Currentables EVA D
Doortune Company makes doorbells. It has a weighted-average cost of capital of 9%, and total assets of $5,880,000. Doortune has current liabilities of $950,000. Its operating income for the year was $645,000 Doortune does not have to pay any income taxes. One of the expenses for accounting purposes was a $110,000 advertising campaign run in early January. The entire amount was deducted this year, although the Doortune CEO believes the beneficial effects of this advertising will last 4 years GT Requirement 1. Calculate residual income, assuming Doortune defines investment as total assets. Begin by determining the formula, then enter the amounts and calculate the Rd for the year Measure of income 645,000 Imputed cost of investment 529.200 115,800 Requirement 2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming that for the purposes of economic value added t capitalized and amortized on a straight-line basis over 4 years. dded the advertising is Begin by determining the formula to calculate the EVA, then enter the amount and calculate the EVA for the year. (Enter the WACC as a decimal in the format X.XXX.) Adjusted operating inc. ( WACC *( Total assets Currentables EVA D
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Doortune Company makes doorbells. It has a weighted-average cost of capital of 9%, and total assets of $5,880,000. Doortune has current liabilities of $950,000. Its operating income for the year
was $645,000. Doortune does not have to pay any income taxes. One of the expenses for accounting purposes was a $110,000 advertising campaign run in early January. The entire amount was
deducted this year, although the Doortune CEO believes the beneficial effects of this advertising will last 4 years.
Requirement 1. Calculate residual income, assuming Doortune defines investment as total assets.
Begin by determining the formula, then enter the amounts and calculate the Ri for the year.
Measure of income
645,000
Imputed cost of investment
529.200
115,800
Requirement 2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming that for the purposes of economic value added the advertising is
capitalized and amortized on a straight-line basis over 4 years.
Begin by determining the formula to calculate the EVA, then enter the amount and calculate the EVA for the year. (Enter the WACC as a decimal in the format X.XXX.)
Adjusted operating inc. (
WACC
x(
Total assets
Current liables 9= EVA
Transcribed Image Text:Requirements
Question 4, P24-34 (similar to)
Part 4 of 5
1. Calculate residual income, assuming Doortune defines investment as total
assets.
2. Calculate EVA for the year. Adjust both the year-end assets and operating
income for advertising assuming that for the purposes of economic value
added the advertising is capitalized and amortized on a straight-line basis over
4 years.
3. Discuss the difference between the outcomes of requirements 1 and 2. Which
measure would you recommend, and why?
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