Lawrence Miller is valuing Yucy Corporation, a corporation that is going out of business in four...

Lawrence Miller is valuing Yucy Corporation, a corporation that is going out of business in four years. Projected financial statements for the remaining life of Yucy are given below.

Year	0	1	2	3	4
Balance Sheet:
Assets	250,000	180,000	130,000	100,000	0
Liabilities	194,604	157,010	116,281	72,072	0
Net worth	55,396	22,990	13,719	27,928	0
Income Statements:
Sales		220,000	240,000	260,000	280,000
Variable cash expenses		60,000	70,000	80,000	90,000
Fixed cash expenses		10,000	10,000	10,000	10,000
Depreciation		70,000	50,000	30,000	100,000
EBIT		80,000	110,000	140,000	80,000
Interest expense		9,730	7,851	5,814	3,604
EBT		70,270	102,149	134,186	76,396
Taxes at 40%		28,108	40,860	53,674	30,559
Net income before salvage		42,162	61,290	80,512	45,838
After-tax salvage value					12,000
Net income		42,162	61,290	80,512	57,838

To assist with valuation, Lawrence also gathered the following information:

Before-tax cost of debt = 5%
Weighted average cost of capital = 11%
Cost of equity=19%

The economic income during Year 1 is closest to:

$30,261
$41,943
$42,813
$90,883
$96,155

Expert Solution

Cost of Debt	5%
Cost of Equity	19%
WACC	11%

Year	0	1	2	3	4
Balance Sheet:
Assets	250,000	180,000	130,000	100,000	0
Liabilities	194,604	157,010	116,281	72,072	0
Net worth	55,396	22,990	13,719	27,928	0
Income Statements:
Sales		220,000	240,000	260,000	280,000
Variable cash expenses		60,000	70,000	80,000	90,000
Fixed cash expenses		10,000	10,000	10,000	10,000
Depreciation		70,000	50,000	30,000	100,000
EBIT		80,000	110,000	140,000	80,000
Interest expense		9,730	7,851	5,814	3,604
EBT		70,270	102,149	134,186	76,396
Taxes at 40%		28,108	40,860	53,674	30,559
Net income before salvage		42,162	61,290	80,512	45,838
After-tax salvage value					12,000
Net income		42,162	61,290	80,512	57,838

Average Equity		39,193	18,355	20,824
Cost of Equity		7,447
Economic Income		34,715	=Net Income - Cost of Equity

Average Capital		215,000	155,000	115,000
Cost of Capital		23,650
EBIT*(1-tax)		48,000
Economic Income		24,350	=Total Operating Income - Cost of Capital

Average Economic Income based on 2 methods		29,533

So, closest is 1st option - $30,261

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