Calculating EVA

Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $195,000 after income taxes. Capital employed equaled $2.1 million. Brewster is 40 percent equity and 60 percent 10-year bonds paying 7 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 12-point premium above the 4 percent rate on long-term Treasury bonds.

Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the new CEO of Brewster Company. He would like to improve EVA for the company. Compute EVA under each of the following independent scenarios that Brewster is considering.

Required:

Use a spreadsheet to perform your calculations and round all interim and percentage figures to four decimal places. If the EVA is negative, enter your answer as a negative amount.

1. No changes are made; calculate EVA using the original data.

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2. Sugar will be used to replace another natural ingredient (atomic number 33) 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 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years.

3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 70 percent of total financing. Total capital employed would be $3,400,000. The new after-tax operating income would be $375,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $375,000, and in Year 1, the premium will be 10 percent above the long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.)

Calculating EVA

Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $189,000 after income taxes. Capital employed equaled $2.8 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 6 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 12-point premium above the 4 percent rate on long-term Treasury bonds.

Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the new CEO of Brewster Company. He would like to improve EVA for the company. Compute EVA under each of the following independent scenarios that Brewster is considering.

Required:

Use a spreadsheet to perform your calculations and round all interim and percentage figures to four decimal places. If the EVA is negative, enter your answer as a negative amount.

1. No changes are made; calculate EVA using the original data.

$ fill in the blank 1

2. Sugar will be used to replace another natural ingredient (atomic number 33) 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 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years.

3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 80 percent of total financing. Total capital employed would be $3,500,000. The new after-tax operating income would be $380,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $380,000, and in Year 1, the premium will be 10 percent above the long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.)

Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $193,000 after income taxes. Capital employed equaled $2.9 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 6 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 12-point premium above the 5 percent rate on long-term Treasury bonds.

Required:

Use a spreadsheet to perform your calculations and round all interim and percentage figures to four decimal places. If the EVA is negative, enter your answer as a negative amount.

1. No changes are made; calculate EVA using the original data.

$ ????

2. Sugar will be used to replace another natural ingredient (atomic number 33) 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 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years.

3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 80 percent of total financing. Total capital employed would be $4,000,000. The new after-tax operating income would be $390,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $390,000, and in Year 1, the premium will be 10 percent above the long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.)

Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $188,000 after income taxes. Capital employed equaled $2.6 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 7 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 13-point premium above the 4 percent rate on long-term Treasury bonds. Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the new CEO of Brewster Company. He would like to improve EVA for the company. Compute EVA under each of the following independent scenarios that Brewster is considering. Required: Use a spreadsheet to perform your calculations and round all interim and percentage figures to four decimal places. If the EVA is negative, enter your answer as a negative amount. 1. No changes are made; calculate EVA using the original data. $ 2. Sugar will be used to replace another natural ingredient (atomic number 33) 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 11 percent the first year and 8 percent the second year. Calculate revised EVA for both years. EVA Year 1 $ Year 2 $ 3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 80 percent of total financing. Total capital employed would be $3,800,000. The new after-tax operating income would be $370,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $370,000, and in Year 1, the premium will be 11 percent above the long-term Treasury rate. In Year 2, it will be 8 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.) EVA Year 1 $ Year 1 (11% premium) $ Year 2 (8% premium) $

Office Works has an order to manufacture several specialty products. The beginning cash and equity balances were $105,000. All other beginning balances were $0. Use your T-Account worksheet to record the following transactions:

1. Purchased $50,000 of direct materials on account.
2. Used $45,000 direct materials in production during the month.
3. Manufacturing employees worked 6,400 hours and were paid at a rate of $8 per hour. Paid cash for the direct labor expense.

4. The company applies OH based on direct labor cost. This year's annual overhead is estimated to be $500,000. The actual direct   labor cost last year was $1,250,000. The company estimates it will spend $625,000 in labor cost this year.
5. Compute and record the OH applied to the job.
6. Completed units costing $50,000 during the month.
7. Sold 6,000 units costing $6.50 during the month. The selling price is 30% above cost. Received cash.
8. This year, the company paid $40,000 cash for actual OH expenses incurred. Last year the company paid $65,000 cash for OH expenses. Record the actual OH costs.
9. The company considers OH differences less than $4,000 to be immaterial. By how much was OH over applied or under applied? Record the difference.

Now, CHOOSE 6 CORRECT STATEMENTS from the choices below. You should have 6 check marks indicating your answer choices. Each answer choice is worth 4 points:

1. The predetermined overhead rate is?
2. The direct labor that is debited to labor expense is?
3. How much are the total current manufacturing costs?
4. How much revenue did the company earn?
5. By how much was MOH over/under applied?
6. How much are the costs of goods manufactured?

Group of answer choices

The cost of goods manufactured is $39,000

The amount of sales revenue earned was $50,700

The direct labor that will be debited to direct labor expense is $0

The predetermined MOH rate is $..75

The total current manufacturing costs are $137,160

The predetermined MOH rate is $.80

The cost of goods manufactured is $40,000

The direct labor that will be debited to direct labor expense is $40,960

The amount of over/under applied MOH is $1,000

The direct labor that will be debited to direct labor expense is $51,200

The amount of over/under applied MOH is $0

The direct labor that will be debited to direct labor expense is $160,137

The amount of sales revenue earned was $50,000

The direct labor that will be debited to direct labor expense is $160,200

The amount of over/under applied MOH is $960

The cost of goods manufactured is $50,000

The predetermined MOH rate is $1.25

The amount of sales revenue earned was $39,000

Office Works has an order to manufacture several specialty products. The beginning cash and equity balances were $105,000. All other beginning balances were $0. Use your T-Account worksheet to record the following transactions:

1. Purchased $50,000 of direct materials on account.
2. Used $45,000 direct materials in production during the month.
3. Manufacturing employees worked 6,400 hours and were paid at a rate of $8 per hour. Paid cash for the direct labor expense.

4. The company applies OH based on direct labor cost. This year's annual overhead is estimated to be $500,000. The actual direct   labor cost last year was $1,250,000. The company estimates it will spend $625,000 in labor cost this year.
5. Compute and record the OH applied to the job.
6. Completed units costing $50,000 during the month.
7. Sold 6,000 units costing $6.50 during the month. The selling price is 30% above cost. Received cash.
8. This year, the company paid $40,000 cash for actual OH expenses incurred. Last year the company paid $65,000 cash for OH expenses. Record the actual OH costs.
9. The company considers OH differences less than $4,000 to be immaterial. By how much was OH over applied or under applied? Record the difference.

Now, CHOOSE 6 CORRECT STATEMENTS from the choices below. You should have 6 check marks indicating your answer choices. Each answer choice is worth 4 points:

1. The predetermined overhead rate is?
2. The direct labor that is debited to labor expense is?
3. How much are the total current manufacturing costs?
4. How much revenue did the company earn?
5. By how much was MOH over/under applied?
6. How much are the costs of goods manufactured?

Group of answer choices

The cost of goods manufactured is $40,000

The amount of sales revenue earned was $50,000

The amount of over/under applied MOH is $0

The predetermined MOH rate is $1.25

The amount of sales revenue earned was $50,700

The direct labor that will be debited to direct labor expense is $160,137

The direct labor that will be debited to direct labor expense is $40,960

The predetermined MOH rate is $.80

The amount of over/under applied MOH is $960

The direct labor that will be debited to direct labor expense is $0

The cost of goods manufactured is $50,000

The total current manufacturing costs are $137,160

The direct labor that will be debited to direct labor expense is $160,200

The cost of goods manufactured is $39,000

The direct labor that will be debited to direct labor expense is $51,200

The predetermined MOH rate is $..75

The amount of over/under applied MOH is $1,000

The amount of sales revenue earned was $39,000

3-3

Wells Technical Institute (WTI), a school owned by Tristana Wells, provides training to individuals who pay tuition directly to the school. WTI also offers training to groups in off-site locations. Its unadjusted trial balance as of December 31, 2017, follows. WTI initially records prepaid expenses and unearned revenues in balance sheet accounts. Descriptions of items athrough h that require adjusting entries on December 31, 2017, follow.

1. An analysis of WTI's insurance policies shows that $3,996 of coverage has expired.
2. An inventory count shows that teaching supplies costing $3,464 are available at year-end 2017.
3. Annual depreciation on the equipment is $15,986.
4. Annual depreciation on the professional library is $7,993.
5. On November 1, WTI agreed to do a special six-month course (starting immediately) for a client. The contract calls for a monthly fee of $3,000, and the client paid the first five months' fees in advance. When the cash was received, the Unearned Training Fees account was credited. The fee for the sixth month will be recorded when it is collected in 2018.
6. On October 15, WTI agreed to teach a four-month class (beginning immediately) for an individual for $4,861 tuition per month payable at the end of the class. The class started on October 15, but no payment has yet been received. (WTI's accruals are applied to the nearest half-month; for example, October recognizes one-half month accrual.)
7. WTI's two employees are paid weekly. As of the end of the year, two days' salaries have accrued at the rate of $100 per day for each employee.
8. The balance in the Prepaid Rent account represents rent for December.

2-a. Post the balance from the unadjusted trial balance and the adjusting entries in to the T-accounts.
2-b. Prepare an adjusted trial balance.

Post the balance from the unadjusted trial balance and the adjusting entries in to the T-account

-a. Prepare Wells Technical Institute's income statement for the year 2017.
3-b. Prepare Wells Technical Institute's statement of owner's equity for the year 2017.
3-c. Prepare Wells Technical Institute's balance sheet as of December 31, 2017.
  

The slope of a regression tells us:

1. The covariance of X and Y
2. The marginal impact of X on Y
3. The marginal impact of Y on X
4. The level of X when Y is zero
5. The level of Y when X is zero

2. The intercept of a regression tells us:

1. The level of Y when X is zero
2. The level of X when Y is zero
3. The marginal impact of Y on X
4. The marginal impact of X on Y
5. The covariance of X and Y

3. ∑(Y – Ŷ)² is essentially a measure of

1. How much our predictions miss the actual data
2. How much variance we explain with X
3. How much variance we explain with Y
4. The covariance between the prediction and X
5. How much our predictions deviate from X

4. The main difference between the calculation of Pearson’s r and the slope of a regression is

1. The inclusion of the covariance in the numerator
2. The inclusion of the SSx in the denominator
3. The inclusion of the SSy in the denominator
4. The inclusion of the SSx in the numerator
5. The inclusion of the SSy in the numerator

5. A regression with a slope of 4 tells us

1. The slope is large and significant
2. The slope is large but not significant
3. The slope is small and significant
4. The slope is small and not significant
5. Not enough information to decide

6. A significance test for beta that fails to reject the null

1. Cannot distinguish beta from zero
2. Lacks sufficient information to make a decision
3. Can distinguish beta from zero
4. Tells us that beta is negative
5. Tells us we have made a Type I Error

The slope of a regression tells us:

1. The covariance of X and Y
2. The marginal impact of X on Y
3. The marginal impact of Y on X
4. The level of X when Y is zero
5. The level of Y when X is zero

2. The intercept of a regression tells us:

1. The level of Y when X is zero
2. The level of X when Y is zero
3. The marginal impact of Y on X
4. The marginal impact of X on Y
5. The covariance of X and Y

3. ∑(Y – Ŷ)² is essentially a measure of

1. How much our predictions miss the actual data
2. How much variance we explain with X
3. How much variance we explain with Y
4. The covariance between the prediction and X
5. How much our predictions deviate from X

4. The main difference between the calculation of Pearson’s r and the slope of a regression is

1. The inclusion of the covariance in the numerator
2. The inclusion of the SSx in the denominator
3. The inclusion of the SSy in the denominator
4. The inclusion of the SSx in the numerator
5. The inclusion of the SSy in the numerator

5. A regression with a slope of 4 tells us

1. The slope is large and significant
2. The slope is large but not significant
3. The slope is small and significant
4. The slope is small and not significant
5. Not enough information to decide

6. A significance test for beta that fails to reject the null

1. Cannot distinguish beta from zero
2. Lacks sufficient information to make a decision
3. Can distinguish beta from zero
4. Tells us that beta is negative
5. Tells us we have made a Type I Error

What your top three takeaways are from this article. As a supervisor or manager, how would you apply these points?

The most important influence on ethical behavior in the workplace is overall company culture, which determines whether employees are valued or belittled and whether stakeholders are treated with trust or suspicion. A company that bases its policies and decisions on deeply rooted ethics will create a culture in which employees are naturally disposed to act ethically, too. The type of integrity that is at the root of an ethical company culture cannot be faked or taught, but it can be contagious and inspiring. As Jill Young of South University's School of Business explains, "If you act with integrity, ethical behavior is just a natural progression."
Customer Service
The values that shape an ethical company culture influence the relationships that a business maintains with its customers. An ethical company will train employees to treat customers with dignity and respect, and to be fair and honest with them. Employees who see such behavior as an integral part of customer service will understand the depth of the company's commitment to ethical behavior. They will likely model their work accordingly because ethical behavior can inspire kindness, honesty and fairness.
Human Resources
Ethical human resource policies are vital to creating and maintaining an ethical company culture. Employees who are treated with basic decency are more likely to be content with their jobs. When employees feel exploited, they are prone to overt unethical behavior such as theft, as well as more subtle offenses such as using company resources for personal gain. When employees are fairly compensated for their work, they are likely to give more to the company and less inclined to take advantage of opportunities to cut corners or exploit situations for personal gain
Product Integrity
A company culture that inspires ethical behavior in its employees will probably provide products and services created with ethical values in mind. For example, a food business that uses optimally fresh ingredients handled in a clean and compliant facility most likely won't have to be dishonest with customers who get sick from eating the company's food. Employees who know they can stand behind the products they sell will probably be inspired to act ethically in other facets of their work life.
Competitive Integrity
Although a company's competitors are often seen as enemies, a truly ethical company extends its solid values to the way it treats its competitors as well as its stakeholders. Calling a competitor, pretending to be a customer and asking questions that you will use to create competing products is dishonest. Employees who are asked to engage in this type of behavior get the message that all company values are questionable, and this impression will interfere with your overall efforts to maintain an ethical workplace.

On October 1, 2018, Santana Rey launched a computer services company, Business Solutions, that is organized as a corporation and provides consulting services, computer system installations, and custom program development. Rey uses the calendar year for reporting purposes and expects to prepare the company’s first set of financial statements on December 31, 2018. Oct. 1 S. Rey invested $48,000 cash, a $27,000 computer system, and $8,500 of office equipment in the company in exchange for its common stock. 3 The company purchased $1,340 of computer supplies on credit from Harris Office Products. 6 The company billed Easy Leasing $5,500 for services performed in installing a new web server. 8 The company paid $1,340 cash for the computer supplies purchased from Harris Office Products on October 3. 10 The company hired Lyn Addie as a part-time assistant for $130 per day, as needed. 12 The company billed Easy Leasing another $2,300 for services performed. 15 The company received $5,500 cash from Easy Leasing as partial payment toward its account. 17 The company paid $725 cash to repair computer equipment damaged when moving it. 20 The company paid $1,728 cash for advertisements published in the local newspaper. 22 The company received $2,300 cash from Easy Leasing toward its account. 28 The company billed IFM Company $5,238 for services performed. 31 The company paid $910 cash for Lyn Addie’s wages for seven days of work this month. 31 The company paid $3,500 cash in dividends to the owner (sole shareholder). Required: Enter the amount of each transaction on individual items of the accounting equation. (Enter decreases to account balances with a minus sign. Enter as per the transaction order provided in the question data.)