Share
Explore BrainMass

Economic Value Added to TKK

TKK has $1 billion of capital invested in several projects that are expected to generate a pretax operating profit of $170 million next year. TKK has an estimated tax cost of capital of 15%

1: What is the pretax economic value added expected to generate next year? Calculate economic value added based on pretax operating profit and based on expected retun on invested capital.

2: the following is actions are considered:
a) a examination of the debt to equity ratio that could lower its pretax cost of capital to 14%.
b) the acquisition of assets worth $100 million expected to generate a pretax operating profit of $20 million next year.
c)10$ million reduction in operating expenses that should not affect revenues.
d) the sale of assets at their book value of $100 million, with an expected pretax operating profit of $10 million next year.
e) $60 million reduction in invested capital that should not affect operating profit.

How do these decisions improve the expected pretax economic value added.

Solution Preview

TKK has $1 billion of capital invested in several projects that are expected to generate a pretax operating profit of $170 million next year.
TKK has an estimated tax cost of capital of 15%

1: What is the pretax economic value added expected to generate next year? Calculate economic value added based on
pretax operating profit and based on expected return on invested capital.

Pretax ...

Solution Summary

The economic value added to TKK is determined in the solution.

$2.19