Answer:
Bombay Energy and Tangent Corporation
1. Bombay Energy
a) Net Income:
Sales $12,500
Operating Costs $9,500
Gross profit $3,000
Depreciation $925
EBIT $2,075
Interest Expense $234
EBT $1,841
Taxes (37%) (681)
Net Income $1,160
b) Free Cash Flow:
= $283
2. Tangent Corporation
a) EVA:
= -$762,720
Explanation:
a) Bombay Data:
Sales $12,500
Operating Costs $9,500
Depreciation $925
Outstanding bonds = $3,900
Interest Rate on bonds = 6%
Interest expense = $234 ($3,900 * 6%)
Federal and State Income Tax Rate = 37%
Capital expenditures = $1,500
Net Operating Working Capital investment = $450
b) Bombay' Free Cash Flow equals its earnings before interest and taxes multiplied by (1 − tax rate), add depreciation and amortization, and then subtract changes in working capital and capital expenditure.
EBIT $2,075 (1 - 37%)
Depreciation 925
Capital expenditure (1,500)
Net working capital (450)
Free Cash Flow $283
= $1,307 + 925 - ($1,500 + 450)
= $283
c) Tangent Data:
Net Income - $756,000
Interest Expense - $300,000
Income before tax $456,000
Tax Rate -37% (168,720)
NOPAT $287,280
Total Investor Supplied Capital - $10.5 million
Weighted Average Cost of Capital -10%
The formula for calculating EVA is:
EVA = NOPAT - (Invested Capital * WACC)
Where:
NOPAT = Net operating profit after taxes
Invested capital = Debt + capital leases + shareholders' equity
WACC = Weighted average cost of capital
= $287,280 - ($10,500,000 * 10%)
= $287,280 - 1,050,000
= -$762,720
