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Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $194,000 after3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering sell

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Answer #1
1 The value of EVA is determined as below:
EVA = Operating income after tax - weighted average cost of capital * capital employed
weighted average cost of capital = weight of debt*After tax cost of debt + weight of equity * cost of equity
values given in the question,
WACC = 60% * 7%(1-40%) + 40% * (13% + 5%) = 9.72%
EVA = 194000 - 9.72% (2600000) = -$58720
2 As per the required question,
we have to calculate the revised weighted average cost of capital for each year:
WACC (year 1) = 60% * 7%(1-40%) + 40% * (11% + 5%) = 8.92%
EVA = 194000 - 8.92% (2600000) = -$37920
WACC (year 2) = 60% * 7%(1-40%) + 40% * (8% + 5%) = 7.72%
EVA = 194000 - 7.72% (2600000) = -$6720
Year 1   -$37920
Year 2   -$6720
3 Again,we have to calculate the revised weighted average cost of capital for each year:
WACC = 20% * 7%(1-40%) + 80% * (13% +5%) = 15.24%
EVA (year 1) = 380000 - 15.24% (4000000) = -$229600
WACC = 20% * 7%(1-40%) + 80% * (11% +5%) = 13.64%
EVA (year 2) = 380000 - 13.64% (4000000) = -$165600
WACC = 20% * 7%(1-40%) + 80% * (8% +5%) = 11.24%
EVA (year 3) = 380000 - 11.24% (4000000) = -$69600
Year 1 -$229600
Year 2 (11% premium) -$165600
Year 3 (8% premium) -$69600
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