Contemporary Engineering Economics (6th Edition)
6th Edition
ISBN: 9780134105598
Author: Chan S. Park
Publisher: PEARSON
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Chapter 15, Problem 6P
To determine
Calculate the after tax cost of debt.
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Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Googleʹs marginal tax rate is 35% and Googleʹs borrowing cost is 7%. Assume that investors hold Google stock in retirement accounts that are free from personal taxes. If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently, then the amount that Google needs to borrow is closest to
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Calculating EVA
Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $186,000 after income taxes. Capital employed equaled $2.1 million. Brewster is 40 percent equity and 60 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 12-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.
Required:
Use a spreadsheet to perform your calculations and round all interim and percentage figures to four decimal places. If the EVA is negative, enter your answer as a negative amount.
1. No changes are made; calculate EVA using the original data.
2. Sugar will be used to replace another…
Chapter 15 Solutions
Contemporary Engineering Economics (6th Edition)
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