Herbal Resources is a small but profitable producer of dietary supplements for pets. This is not a high-tech business, but Herbal’s earnings have averaged around $1.2 million after tax, largely on the strength of its patented enzyme for making cats nonallergenic. The patent has eight years to run, and Herbal has been offered $4 million for the patent rights.
Income Statement for 2011 | Assets, December 31, 2011 | ||
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Revenue | $ 56.66 | Net working capital | $ 7.08 |
Raw materials cost | 18.72 |
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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 |
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Net income | $ 8.03 | Total assets | $ 55.40 |
Herbal’s assets include $2 million of working capital and $8 million of property, plant, and equipment. The patent is not shown on Herbal’s books. Suppose Herbal’s cost of capital is 15%. What is its EVA?
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