Question
In: Accounting
CarKing is a company in the luxury car industry. To verify its performance, the company is...
CarKing is a company in the luxury car industry. To verify its performance, the company is using economic value added (EVA), a managerial technique. The EVA for the company has been calculated as $202,545. This amount has been determined with the following information.
Marginal tax rate 35%
Cos of debt before tax 11%
Cost of equity 13.5%
Costs capitalized for Development 25%
Costs capitalized for Research 30%
Amortization period 6 years
Operating Income $445,808
Capital Employed $1,950,000
Total Development Cost $80,000
Total Research Cost $120,000
Goodwill impairment loss included in income $36,500
REQUIRED:
a) Assume that R&D costs for the year occurred on Jan 1. What is the capital structure of Car King?
b) What would be the new EVA amount if capital structure of the company is 70% debt and 30% equity?
Solutions
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