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Economic Value Added to TKK

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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.

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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
See Also This Related BrainMass Solution

Appropriate pricing methods for Glasses Hut

It is no surprise that owners of Glasses Hut have a pretty clear vision of where the chain is headed, but even they never foresaw some early challenges that nearly derailed the eyewear company.

Problems with supply, aggressive rivals and recession all posed serious risks during the difficult start-up period, but founders Andy Lee and wife Sandy had the perseverance and business sense to prevail.

Glasses Hut, including its subsidiary brands, now has 43 shops island wide and raked in $40 million in revenue last year. An impressive record, given that it began with a shop in Clementi.

in January 1997, restricted by limited funds for extra staff. Andy Lee and Sandy, both Singaporeans with optometry degrees from Britain, started their shop with their savings and loans. Business was brisk initially and they even had no time for meals, working daily from 10 am to 11 pm, seven days a week.

More trials came in 1999, when the couple realised just how cut-throat the industry could be. Some larger chain stores, worried about the young upstart's growth, banded together to force some suppliers to stop selling stocks to Glasses Hut.

Overnight, Glasses Hut was left without much stock to sell and they had to cancel orders and refund customers' deposits. A possible solution was to look overseas, so Andy Lee knocked on the doors of the headquarters of some large suppliers.

That proved to benefit the budding chain hugely, as it managed to secure goods at a lower price, bypassing the middleman. But the catch was that the suppliers asked for large orders, to justify their gamble on a new operation.

While some companies might crumble under the pressure, Glasses Hut rose to the occasion and undertook a rapid expansion. Within three years of the supply crisis, it had 12 shops. Its fast growth propelled the company into the big league of Singapore's optical retail industry.

The company showed a steady hand during the 2003 SARS crisis, when sales plunged. It had to work extra hard, and called up regular customers to offer more services to increase sales. This period also provided more opportunities to train their staff to provide better customer service.

Another problem lies in the difficulty of finding skilled staff like optometrists. Although some local institutions offer diplomas and degrees in the field, there is still shortage of talent and they command rather high wages. However, the company ensures that they have well qualified staff to manage their outlets.

Glasses Hut offers a wide selection of eyewear products, and tries to bring in new ranges quickly. It also sources for products at optical fairs, including those in Milan and Paris.

Their growth in business has been undoubtedly helped by the poor eyesight of Singaporeans: about 80% of those above 18 years are short sighted, one of the highest myopia rates in the world.

In 2008, Glases Hut received a grant from Spring Singapore to upgrade its point of sale system, which improved its stock management. The $125,000 grant was given under Spring's Technology Innovation Programme and it helped them to work more systematically, reducing human error and increasing their productivity. There was hence less manual counting and checking required.

In July 2011, the company also used the same system to implement a fingerprint login system to simplify tracking of staff attendance and punctuality, and in doing so, helped to quantify staff productivity. Its aggressive programme of store openings has delivered annual growth of 20% for the last five years.

However, the company may slow expansion a little as they have already achieved a reasonable spread of locations in Singapore.

The company has some outlets in Beijing and Kuala Lumpur and they are currently studying their options as they feel that there are further potentials overseas. 

Question 1A

Apply two (2) appropriate pricing methods that Glasses Hut could use to price its products and services at its retail outlets. Give reasons to support your answer.

Question 1B

Employ two (2) price adaptation strategies that Spectacle Hut could use to make its products and services more attractive to consumers.

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