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Abnormal earnings are:
Abnormal earnings are: AEt= Actual earning t-Required or "normal" earnings tWhich may be expressed as Aet= NOPAT t- (r x BVt-1)Where NOPAT is the firm's net operating profit after taxes, r is the cost of equity capital and BV t-1.Required:4. Assume that the firm in requirement 2 can divest $25,000 of unproductive capital, which NOPAT falling by only $2,000. What is the new AE?5. Assume that the firm in requirement 2 can add a new division at a cost of $40,000, which will increase NOPAT by $7,600 per year. Would adding the new division increase AE?6. Assume that the firm in requirement 1 can add a new division at a cost of $25,000, which will increase NOPAT by $3,500 per year. Would adding the new division increase AE?
