[stoleway]

Zig Corp. provides the following information:

Pretax operating profit $300,000,000

Tax rate 40%

Capital used to generate profits 50% debt, 50% equity $1,200,000,000

Cost of equity 15%

Cost of debt 5%

What of the following represent Zig’s year-end economic value-added amount?

$180,000,000

$120,000,000

$0

$60,000,000

Wiley gave the solution to this problem as 60,000,000. The right answer should be 72,000,000. Is anyone else having an issue with this ?

 

 

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[jfreelov]

60,000 is the correct answer

EVA = NOPAT – c * K

EVA = (300,000 * (1 – 0.4)) – (0.5 * 0.15 + 0.5 * 0.05) * (1,200,000)

EVA = (300,000 * 0.6) – (0.075 + 0.025) * 1,200,000

EVA = 180,000 – 0.1 * 1,200,000

EVA = 60,000

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

60,000 is the correct answer

EVA = NOPAT – c * K

EVA = (300,000 * (1 – 0.4)) – (0.5 * 0.15 + 0.5 * 0.05) * (1,200,000)

EVA = (300,000 * 0.6) – (0.075 + 0.025) * 1,200,000

EVA = 180,000 – 0.1 * 1,200,000

EVA = 60,000

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[stoleway]

Similar question can be found in gleim and it gives the following supporting solution

After tax income ..300,000,000x (1-40%)

= 180,000,000

Less…WACC x Capital…(9% x 1,200,000,000)

= (108,000,000)

EVA= 180,000,0000 – 108,000,000= 72,000,000

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

Similar question can be found in gleim and it gives the following supporting solution

After tax income ..300,000,000x (1-40%)

= 180,000,000

Less…WACC x Capital…(9% x 1,200,000,000)

= (108,000,000)

EVA= 180,000,0000 – 108,000,000= 72,000,000

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[jfreelov]

Similar problem, but it looks like one thing changed: the WACC. In this example WACC is 10%, not 9%.

Did the Gleim problem have the same breakdown of equity and debt?

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

Similar problem, but it looks like one thing changed: the WACC. In this example WACC is 10%, not 9%.

Did the Gleim problem have the same breakdown of equity and debt?

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[stoleway]

WACC is 9%

Cost of debt = 1.5………..(50%x 5% x (1-40%)

Cost of equity =7.5…………(50% x 15%)

WACC 9%

Yes, gleim has the same capital structure.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

WACC is 9%

Cost of debt = 1.5………..(50%x 5% x (1-40%)

Cost of equity =7.5…………(50% x 15%)

WACC 9%

Yes, gleim has the same capital structure.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[jfreelov]

Okay, so the disagreement arises from whether or not you consider tax effects in calculating WACC. I would tend to say that unless it specifies otherwise, the stated cost of debt of 5% is already net of tax. But I could see the argument going either way.

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

Okay, so the disagreement arises from whether or not you consider tax effects in calculating WACC. I would tend to say that unless it specifies otherwise, the stated cost of debt of 5% is already net of tax. But I could see the argument going either way.

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[stoleway]

Jfreelov…

I appreciate your help. I still think wileys solution is wrong.

I'm impressed with your scores, I wish I can tear BEC apart like you did 🙂

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

Jfreelov…

I appreciate your help. I still think wileys solution is wrong.

I'm impressed with your scores, I wish I can tear BEC apart like you did 🙂

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[jfreelov]

It's a reasonable opinion, but the important thing is you seem to grasp the concepts.

As for BEC score, I was an econ major and that really helped a lot.

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

It's a reasonable opinion, but the important thing is you seem to grasp the concepts.

As for BEC score, I was an econ major and that really helped a lot.

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[Author]

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