Problem:
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%
Q1: 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.
Q2: 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.