80.2K

Verified Solution

Link Copied!

Gable Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after-tax divisional income was $3,155,000 in year 3 The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses bock to after-tax divisional income. Second, the company managers belleve that advertising has a three-year positive effect on the sale of the company's products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 40 percent, 35 percent in year 2 , and 25 percent in year 3 . Advertising expenses in year 2 will be expensed 40 percent, 35 percent in year 3 , and 25 percent in year 4. Advertising expenses in year 3 will be amortized 40 percent, 35 percent in year 4 , and 25 percent in year 5 . Third, unamorized advertising expenses become part of the divisional investment in the EVA calculations. Media Division incurred advertising expenses of $562,000 in year 1 and $1,072,000 in year 2 . it incurred $1,282,000 of advertising in year 3 . Before considering the unamortized advertising. the Media Division had total assets of $29,150,000 and current liabilities of $3,710,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year. The company uses a 14 percent cost of capital to compute EVA. Required: Compute the EVA for the Media Division for year 3. Is the division adding value to shareholders? Complete this question by entering your answers in the tabs below. Compute the EVA for the Media Division for year 3. Note: Negative omounts should be indicated by a minus sign. The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-tax divisional income. Second, the company managers believe that advertising has a three-year positive effect on the sale of the company's products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 40 percent, 35 percent in year 2, and 25 percent in year 3. Advertising expenses in year 2 will be expensed 40 percent, 35 percent in year 3 , and 25 percent in year 4. Advertising expenses in year 3 will be amortized 40 percent, 35 percent in year 4 , and 25 percent in year 5 . Third. unamortized advertising expenses become part of the divisional investment in the EVA calculations. Media Division incurred advertising expenses of $562,000 in year 1 and $1,072,000 in year 2 . It incurred $1,282,000 of advertising in year 3 . Before considering the unamortized advertising, the Media Division had total assets of $29,150,000 and current liabilities of $3,710,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year. The company uses a 14 percent cost of capital to compute EVA Required: Compute the EVA for the Media Division for year 3 Is the division adding value to shareholders? Complete this question by entering your answers in the tabs below. Compute the EVA for the Media Division for year 3 . Note. Negative amounts should be indicated by a minus sign. advertising expenses of $562,000 in year 1 and $1,072,000 in year 2 it incurred $1,282,000 of advertising in year 3 Before considering the unamortized advertising, the Media Division had total assets of $29,150,000 and current liabilites of $3,710,000 at the beginning of year 3. Gable calculates EVA using the divisional investment at the beginning of the year, The company uses a 14 percent cost of capital to compute EVA Required: Compute the EVA for the Media Division for year 3. Is the division adding value to shareholders? Complete this question by entering your answers in the tabs below. Is the division adding value to shareholders

Answer & Explanation Solved by verified expert

See Answer