Your firm, Southern Comfort Corp. (SCC) has $1 billion of capital invested in se

Question

Your firm, Southern Comfort Corp. (SCC) has $1 billion of capital invested in several telecommunication projects, which are expected to generate a pretax operating profit of $170 million next year. SCC has an estimated pretax cost of capital a 15%.
Please show all calculations.
A. What is the pretax economic value added (EVA) that SCC is expected to generate next year? Calculate EVA, first based on pretext operating profit and then based on expected return on invested capital.
B. SCC is considering five possible actions, which should improve its expected pretax EVA. These are as follows: 1) A $10 million reduction and operating expenses that should not affect revenue. 2) A $60 million reduction in invested capital that should not affect operating profit. 3) A re-examination of its capital structure (debt-to-equity ratio) that could lower it's pretax cost of capital to 14%. 4) The sale of assets at their book value of $100 million. These assets are expected to generate a pretax operating profit of $10 million next year. 5) The acquisition of assets of $100 million. These assets are expected to generate a pretext operating profit of $10 million next year.
Calculate each and choose the best course of action for SCC. Your firm, Southern Comfort Corp. (SCC) has $1 billion of capital invested in several telecommunication projects, which are expected to generate a pretax operating profit of $170 million next year. SCC has an estimated pretax cost of capital a 15%.
Please show all calculations.
A. What is the pretax economic value added (EVA) that SCC is expected to generate next year? Calculate EVA, first based on pretext operating profit and then based on expected return on invested capital.
B. SCC is considering five possible actions, which should improve its expected pretax EVA. These are as follows: 1) A $10 million reduction and operating expenses that should not affect revenue. 2) A $60 million reduction in invested capital that should not affect operating profit. 3) A re-examination of its capital structure (debt-to-equity ratio) that could lower it's pretax cost of capital to 14%. 4) The sale of assets at their book value of $100 million. These assets are expected to generate a pretax operating profit of $10 million next year. 5) The acquisition of assets of $100 million. These assets are expected to generate a pretext operating profit of $10 million next year.
Calculate each and choose the best course of action for SCC.
Please show all calculations. Please show all calculations.
A. What is the pretax economic value added (EVA) that SCC is expected to generate next year? Calculate EVA, first based on pretext operating profit and then based on expected return on invested capital.
B. SCC is considering five possible actions, which should improve its expected pretax EVA. These are as follows: 1) A $10 million reduction and operating expenses that should not affect revenue. 2) A $60 million reduction in invested capital that should not affect operating profit. 3) A re-examination of its capital structure (debt-to-equity ratio) that could lower it's pretax cost of capital to 14%. 4) The sale of assets at their book value of $100 million. These assets are expected to generate a pretax operating profit of $10 million next year. 5) The acquisition of assets of $100 million. These assets are expected to generate a pretext operating profit of $10 million next year.
Calculate each and choose the best course of action for SCC.

Explanation / Answer

A.

Economic value added = Net operating Profit – (Invested capital * Cost of capital) = $170 million – ($1000 million*0.15) = $170 million - $150 million = $20 million

B.

1)

Net Operating profit = $170 million + $10 million = $180 million

EVA = $180 million - $150 million = $30 million

2)

Invested capital = $1000 million - $60 million = $940 million

EVA = $170 million – ($940 million *0.15) = $170 million - $141 million = $29 million

3)

EVA = $170 million – ($1000 million * 0.14) = $170 million - $140 million = $30 million

4)

Sale of assets is not an operating transaction and will not affect the operating revenue.

Net operating profit = $170 million - $10 million = $160 million

EVA = $160 million - $150 million = $20 million

5)

Net operating profit = $170 million + $10 million = $180 million

EVA = $180 million - $150 million = $30 million

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