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Problem 19-16 Consider the following data for the firms Acme and Apex Equity ($ million) 160 800 Debt ($ million) 80 267 ROC
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Answer #1

a-1. The total capital for Acme = Equity + debt

= $160 million + $80 million = $240 million

The economic value added for Acme = (ROC - cost of capital) *the total capital of the firm.

= (17% − 9%) * $240 million = $19.20 million

The total capital for Apex = Equity + debt

= $800 million + $267 million = $1,067 million

The economic value added for Apex = (ROC - cost of capital) *the total capital of the firm.

= (15% − 5%) * $1,067 million = $53.35 million

a-2. Apex has the higher economic value added

b-1. The economic value added per dollar for Acme = (ROC - cost of capital) *$1

= (17% − 9%) * $1 = $0.08 per dollar

The economic value added per dollar for Apex = (ROC - cost of capital) *$1

= (15% − 5%) * $1 = $0.05 per dollar

b-2. Acme has the higher economic value added per dollar of invested capital

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