Response to the following problem:
Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $210,000 after income taxes. Capital employed equaled $2 million. Brewster is 50 percent equity and 50 percent 10-year bonds paying 6 percent interest. Brewster's marginal tax rate is 35 percent. The company is considered a fairly risky investment and therefore commands a premium of 12 percentage points above the 6 percent rate on long-term Treasury bonds. Mortimer Brewster's aunts, Abby and Martha, have just retired, and Mortimer is the new CEO of Brewster Company. He would like to improve EVA (Economic value added) for the company.
(Use a spreadsheet to perform your calculations.)
Required:
1. No changes are made; calculate EVA using the original data.
2. Sugar will be used to replace another natural ingredient (arsenic) in the elderberry wine. This should not affect costs but will begin to affect the market assessment of Brewster Company, bringing the premium above long-term Treasury bills to 9 percent the first year and 6 percent the second year. Calculate revised EVA for both years.