Calculate Adjusted NOPAT • Calculate net profit after tax (NPAT).

Wk5 – Managing shareholder value creation *EXTRACT Step 1: Calculate Adjusted NOPAT  Calculate net profit after tax (NPAT).  Adjustments: a) Financing effects of interest o Reasons for adjustment: - Interest expense is incurred as a result of a firm’s financing choice, not a result of operations. - To avoid the double counting of debt financing costs; will be accted for in the calculation of cost of capital in step 3. o Add interest expense back to NPAT bc in calculating NPAT, all expenses have been deducted. To reverse this effect, it is added back. o Note: Interest expense provides a tax shield to the co bc it reduces NPAT and the co pays less tax. When it is added back, the tax shields no longer exists. b) R&D o Reasons for adjustment: - Add back R&D costs for the CURRENT YR ($12k) bc they are currently expensed but summer ltd expects these costs to have future economic benefits that will be realised over 3yrs. - The correct treatment of R&D costs is to capitalise R&D and amortise the costs when benefits are realised.

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Bc summer ltd estimates that the benefits of R&D will be realised over 3 yrs, divide each R&D cost by 3. The total amortisation expense = $11k

Determine the amount of R&D to be capitalised – the amount of R&D costs where benefits have not yet been realised. R&D capitalised is similar to a carrying amount. R&D Capitalised = R&D costs – Acc. Amortisation *(Carrying amount = Historical cost – Acc. Depn)

Steps 2 & 3: Calculate Capital Employed and WACC

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Capital employed: The sum of the firm’s sources of capital (equity + debt) o When calculating equity, add the net capitalised R&D. WACC: Weighted avg cost of financing from all sources. Calculated by determining the proportion of diff sources of financing. o Equity CC = 0.546[0.5(12%)+0.5(12%)] = 0.065 o Long term debt CC = 0.284[0.5(10%)+0.5(7%)] = 0.02 o Short-term debt CC = 0.17[0.5(8%)+0.5(5.6%)] = 0.01 o WACC = 0.065 + 0.02 + 0.01 = 0.095