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

Expert Solution

ekkarill92 answered 1 year ago
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