Question

The Duffy Dog Book Company has two divisions: The Brick and Mortar division sells books through more than 100 bookstores throughout the United States; the Internet division was formed 18 months ago and sells books via the Internet. Data for the past year are:

		Brick and Mortar Division		Internet Division
Total assets		$207,360,000		$19,814,400
Noninterest-bearing current liabilities		8,985,600		3,225,600
Interest expense		1,612,800		535,680
Net income (loss)		35,596,800		(1,440,000	)
Tax rate		20%		0
Cost of capital		10%		12%

Evaluate the two divisions in terms of economic value added (EVA). (Enter negative answers preceding either - sign, e.g. -45 or in parentheses, e.g. (45).)

		Brick & Mortar Division		Internet Division
EVA		$___________________		$________________

Can you please show your work?

Answer 1

		Brick and Mortar division	Internet division
	Net income	$35,596,800	($1,440,000)
Add:	Tax @20%	$8,899,200
	Income before tax ($35,596,800/80%)	$44,496,000	($1,440,000)
Add;	Interest	$1,612,800	$535,680
	Income before tax and interest	$46,108,800
Less:	Tax @20%	($9,221,760)
	NOPAT	$36,887,040	($904,320)
	Invested capital:
	Assets	$207,360,000	$19,814,400
Less:	Liability	($8,985,600)	($3,225,600)
	Invested capital	$198,374,400	$16,588,800
	EVA	$17,049,600	($2,894,976)
		($36,887,040 - (0.10 * 198,374,400))	(-$904,320 -(0.13 * 16,588,800))