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Chapter 22: Problem 15

GM's net income in 2010 was \(\$ 4.7\) billion. What would its accounting profit be if its cost of equity capital was \(\$ 5\) billion? What would its cconomic profit be if its cost of equity capital was \(\$ 5\) billion?

Short Answer

Expert verified
Answer: GM's accounting profit in 2010 was \(\$4.7\) billion, and its economic profit was \(-\$0.3\) billion.

Step by step solution

01

Determine the accounting profit

The accounting profit is equal to the net income, which is given as \(\$4.7\) billion. Therefore, GM's accounting profit in 2010 is: Accounting Profit = Net Income = \(\$4.7\) billion
02

Determine the economic profit

To determine the economic profit, we need to subtract the cost of equity capital from the accounting profit. The cost of equity capital is given as \(\$5\) billion. So, the economic profit of GM in 2010 can be calculated as: Economic Profit = Accounting Profit - Cost of Equity Capital Economic Profit = \(\$4.7\) billion - \(\$5\) billion = \(-\$0.3\) billion So, GM's economic profit in 2010 was \(-\$0.3\) billion. In conclusion, GM's accounting profit in 2010 was \(\$4.7\) billion, and its economic profit was \(-\$0.3\) billion. This shows that while GM had a positive accounting profit, it did not earn an economic profit when considering the cost of the capital provided by the shareholders.

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