05 Jun Question HighTech Company economic value a
Question
HighTech Company economic value added
The following information pertains to HighTech Company for the year ended December 31, 2013:
Net operating income before taxes
$ 422,000
EVA adjusted total capital, December 31, 2013
3,500,000
Research costs in 2013 expensed under GAAP
75,600
Development costs expensed in 2013 under GAAP
55,000
Development costs capitalized in 2013 under GAAP
83,000
Impairment loss of goodwill included in the calculation of GAAP income
23,400
Additional information:
The capital structure is 38% debt and 62% equity.
The market yield on equivalent debt is 6.5%.
The marginal tax rate is 35%.
The cost of equity is 12%.
Research and development costs were incurred on January 1, 2013.
Capitalized development costs are amortized over a period of 5 years in GAAP income; R&D costs are
amortized over the same period in net operating profit after taxes (NOPAT).
Required
a.Determine the economic value added (EVA) for the year ended December 31, 2013, and explain the results.
b.Should the financial performance at HighTech be measured using EVA or ROI? Address the following
points in your answer:
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