Quiz 11_Solution - 6A:130 Fall 2007 Quiz 11 QUIZ 11: is due...

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6A:130 – Fall 2007 Quiz 11 QUIZ 11: is due at beginning of class; Section 1 – Tuesday, 12/11; Section 2 – Wednesday 12/12. To receive credit you must show your work . 1. Flaps Inc. reported operating income of $225,000 for the year 2007. Select year-end balance sheet information includes total assets of $750,000; current liabilities of $200,000; $275,000 of 8% long-term debt; equity of $275,000 (at fair market value, and a related cost of capital of 5%). During 2007, Flaps incurred and expensed $60,000 in R&D related to a single project with a 3 year estimated life. Assuming a 25% effective income tax rate. Compute Flaps Inc.’s EVA for 2007 . Current liabilities Weighted average cost of capital x Total assets - EVA = After-tax operating income - o Operating income adjusted for R&D expense = $225,000 + ($60,000 – ($60,000/3) = $265,000 o Total assets adjusted for R&D expense = $750,000 + ($60,000 – ($60,000/3) = $790,000 o WACC = ((8% x (1 – 25%) x $275,000) + (5% x $275,000)) / ($275,000 + $275,000) = 5.50%
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This test prep was uploaded on 04/07/2008 for the course ACCT 130 taught by Professor Hartman during the Fall '07 term at University of Iowa.

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