View the step-by-step solution to:

Abnormal earnings are:

Abnormal earnings are: AEt= Actual earning t-Required or "normal" earnings t
Which may be expressed as Aet= NOPAT t- (r x BVt-1)
Where NOPAT is the firm's net operating profit after taxes, r is the cost of equity capital and BV t-1.
Required:

4. Assume that the firm in requirement 2 can divest $25,000 of unproductive capital, which NOPAT falling by only $2,000.  What is the new AE?
5. Assume that the firm in requirement 2 can add a new division at a cost of $40,000, which will increase NOPAT by $7,600 per year.  Would adding the new division increase AE?
6.  Assume that the firm in requirement 1 can add a new division at a cost of $25,000, which will increase NOPAT by $3,500 per year.  Would adding the new division increase AE?

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question