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EVA, Computation of Income tax, ROI

1. The Modern Language Corporation earned $1.6 million on net assets of $20 million. The cost of capital is 11.5%. Calculate the net ROI and EVA. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter "EVA" answer in millions rounded to 1 decimal place.)

ROI %

EVA $ million

2. The table below shows a condensed income statement and balance sheet for Androscoggin Copper's Rumford smelting plant (figures in $ millions). Assume the cost of capital is 9%.
Income Statement for 2013 Assets, December 31, 2013
Revenue $ 56.66 Net working capital $ 7.08
Raw materials cost 18.72
Operating cost 21.09 Investment in plant and equipment 69.33
Depreciation 4.50 Less accumulated depreciation 21.01
________________________________________ ________________________________________ ________________________________________ ________________________________________
Pretax income 12.35 Net plant and equipment 48.32
Tax at 35% 4.32
________________________________________ ________________________________________ ________________________________________ ________________________________________
Net income $ 8.03 Total assets $ 55.40
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
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a. Calculate the plant's EVA. (Enter your answer in millions rounded to 2 decimal places.)
EVA $ million

b. The table above shows, the plant is carried on Androscoggin's books at $48.32 million. However, it is a modern design, and could be sold to another copper company for $95 million. How should this fact change your calculation of EVA? (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)
EVA $ million

3. In 2011 Beta Corporation earned gross profits of $760,000.
a. Suppose that it is financed by a combination of common stock and $1 million of debt. The interest rate on the debt is 10%, and the corporate tax rate is 35%. How much profit is available for common stockholders after payment of interest and corporate taxes? (Enter your answer in nearest dollars not in millions.)
Profit $

b. Now suppose that instead of issuing debt Beta is financed by a combination of common stock and $1 million of preferred stock. The dividend yield on the preferred is 8% and the corporate tax rate is still 35%. How much profit is now available for common stockholders after payment of preferred dividends and corporate taxes? (Enter your answer in nearest dollars not in millions.)
Profit $

Solution Summary

The solution computes EVA, ROI as well as income tax in a different example where company has debt in 1 scenario and preferred stockholders in another to find what income is available for common stockholders. Attached in Word.

$2.19