Gable Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after-tax divisionalincome was $3,200,000 in year 3.The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-taxdivisional income. Second, the company managers believe that advertising has a three-year positive effect on the sale of thecompany's products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 40 percent, 35percent 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 25percent 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 incurredadvertising expenses of $580,000 in year 1 and $1,090,000 in year 2. It incurred $1,300,000 of advertising in year 3.Before considering the unamortized advertising, the Media Division had total assets of $29,600,000 and current liabilities of$3,800,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year. Thecompany 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 2Compute the EVA for the Media Division for year 3.Note: Negative amounts should be indicated by a minus sign.Adjusted divisional incomeCost of adjusted divisional investmentEconomic Value Added (EVA) Gable Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after-tax divisionalincome was $3,200,000 in year 3.The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-taxdivisional income. Second, the company managers believe that advertising has a three-year positive effect on the sale of thecompany's products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 40 percent, 35percent 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 25percent 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 incurredadvertising expenses of $580,000 in year 1 and $1,090,000 in year 2. It incurred $1,300,000 of advertising in year 3.Before considering the unamortized advertising, the Media Division had total assets of $29,600,000 and current liabilities of$3,800,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year. Thecompany 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 1Required 2Is the division adding value to shareholders?< Required 1Required 2 >

EVA is used to calculate the economic value of the company, therefore it is also referred to as…

Gable Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after-tax divisional income was $3,200,000 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 $580,000 in year 1 and $1,090,000 in year 2. It incurred $1,300,000 of advertising in year 3. Before considering the unamortized advertising, the Media Division had total assets of $29,600,000 and current liabilities of $3,800,000 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?

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q