Homework Answers
| 1 | After tax cost of each method of financing | |||||||||||||
| Cm | Mortgage Bond=4%*(1-Tax Rate)= | 2.80% | 4*(1-0.3) | |||||||||||
| Cu | Unsecured Bond=6*(1-tax rate) | 4.20% | 6*(1-0.3) | |||||||||||
| Cs | Common Stock=Risk free rate+Premium | 11% | (3+8) | |||||||||||
| 2 | ||||||||||||||
| A | Mortgage Bond= | $1 | million | |||||||||||
| B | Unsecured Bond | $5 | million | |||||||||||
| C | Common Stock | $11 | million | |||||||||||
| D | Total | $17 | million | |||||||||||
| Wm=A/D | Weight of Mortgage Bond= | 0.06 | ||||||||||||
| Wu=B/D | Weight of Unsecured Bond | 0.29 | ||||||||||||
| Ws=C/D | Weight ofCommon Stock | 0.65 | ||||||||||||
| Weighted Average Cost of Capital(WACC) | ||||||||||||||
| Cost of Mortgage Bond*Weight of Mortgage Bond+Cost of Unsecured Bond*Weight of Unsecured bond+Cost of Common Stock*Weight of Common Stock | ||||||||||||||
| WACC=Cm*Wm+Cu*Wu+Cs*Ws= | 8.52% | |||||||||||||
| Weighted Average Cost of Capital | 8.52% | |||||||||||||
| Dollar amount of capital employed | $17,000,000 | |||||||||||||
| 3 | Net Operating Income After Tax(NOPAT) | $1,196,500 | ||||||||||||
| WACC | 8.52% | |||||||||||||
| Capital Invested | $17,000,000 | |||||||||||||
| Economic Value Added (EVA)=NOPAT-(WACC*Capital Invested) | ||||||||||||||
| EVA=1196500-(8.52%*17000000)= | ($251,500.00) | |||||||||||||
| Company is destroying wealth | ||||||||||||||
| 4 | If the risk premium of common stock is 5% | |||||||||||||
| Cs | After tax cost of common stock=5+3 | 8% | ||||||||||||
| WACC=2.8*0.06+4.2*0.29+8*0.65 | 6.58% | |||||||||||||
| EVA=1196500-(6.58%*17000000)= | $78,500 | |||||||||||||
|
||||||||||||||
Add Answer to:
Calculating Weighted Average Cost of Capital and Economic Value Added (EVA) Ignacio, Inc., had after-tax operating inco...
Calculating Weighted Average Cost of Capital and Economic Value Added (EVA) Ignacio, Inc., had after-tax operating...
Calculating Weighted Average Cost of Capital and Economic Value Added (EVA) Ignacio, Inc., had after-tax operating income last year of $1,195,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 percent interest, and $10 million in common stock, which was considered to be relatively risky (with a risk premium of 8 percent). The rate on long-term treasuries is 3 percent. Ignacio, Inc., pays a...
Tgnacio, Inc, had after-tax operating income last year of $1,198,000. Three souroes of finanoing ...
Tgnacio, Inc, had after-tax operating income last year of $1,198,000. Three souroes of finanoing were used by the company: $2 milion of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 peroent interest, and $11 million in common stock, which was onsidered to be relatively risky (with a risk premium of 8 percent). The rate on long-term trensuries is 3 percent. Ignacio, Inc, pays a marginal tax rate of 30 percent Required: 1. Calculate the after-tax...
Tgnacio, Inc, had after-tax operating income last year of $1,198,000. Three souroes of finanoing were used...
Tgnacio, Inc, had after-tax operating income last year of $1,198,000. Three souroes of finanoing were used by the company: $2 milion of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 peroent interest, and $11 million in common stock, which was onsidered to be relatively risky (with a risk premium of 8 percent). The rate on long-term trensuries is 3 percent. Ignacio, Inc, pays a marginal tax rate of 30 percent Required: 1. Calculate the after-tax...
Ignacio, Inc., had after-tax operating income last year of $1,198,000. Three sources of financing...
Ignacio, Inc., had after-tax operating income last year of $1,198,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $11 million in common stock, which was considered to be relatively risky (with a risk premium of 8 percent). The rate on long-term treasuries is 3 percent. Ignacio, Inc., pays a marginal tax rate of 30 percent. Required: 1. Calculate the after-tax...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $185,000 after...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $185,000 after income taxes. Capital employed equaled $2.3 million. Brewster is 40 percent equity and 60 percent 10-year bonds paying 7 percent interest. Brewster's marginal tax rate is 40 percent. The company is consi dered a fairly risky investment and probably commands a 12-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster's aunts, Abby and Martha, have just retired, and Brewster is...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $194,000 after...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $194,000 after income taxes. Capital employed equaled $2.6 million. Brewster is 40 percent equity and 60 percent 10-year bonds paying 7 percent interest. Brewster's marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster's aunts, Abby and Martha, have just retired, and Brewster is the...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $194,000 after...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $194,000 after income taxes. Capital employed equaled $2.6 million. Brewster is 40 percent equity and 60 percent 10-year bonds paying 7 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $192,000 after...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $192,000 after income taxes. Capital employed equaled $2.4 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 7 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 12-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $188,000 after...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $188,000 after income taxes. Capital employed equaled $2.3 million. Brewster is 40 percent equity and 60 percent 10-year bonds paying 7 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 12-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $189,000 after...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $189,000 after income taxes. Capital employed equaled $2.9 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 7 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 12-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the...
Tgnacio, Inc, had after-tax operating income last year of $1,198,000. Three souroes of finanoing were used by the company: $2 milion of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 peroent interest, and $11 million in common stock, which was onsidered to be relatively risky (with a risk premium of 8 percent). The rate on long-term trensuries is 3 percent. Ignacio, Inc, pays a marginal tax rate of 30 percent Required: 1. Calculate the after-tax...
Tgnacio, Inc, had after-tax operating income last year of $1,198,000. Three souroes of finanoing were used by the company: $2 milion of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 peroent interest, and $11 million in common stock, which was onsidered to be relatively risky (with a risk premium of 8 percent). The rate on long-term trensuries is 3 percent. Ignacio, Inc, pays a marginal tax rate of 30 percent Required: 1. Calculate the after-tax...
Ignacio, Inc., had after-tax operating income last year of $1,198,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $11 million in common stock, which was considered to be relatively risky (with a risk premium of 8 percent). The rate on long-term treasuries is 3 percent. Ignacio, Inc., pays a marginal tax rate of 30 percent. Required: 1. Calculate the after-tax...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $185,000 after income taxes. Capital employed equaled $2.3 million. Brewster is 40 percent equity and 60 percent 10-year bonds paying 7 percent interest. Brewster's marginal tax rate is 40 percent. The company is consi dered a fairly risky investment and probably commands a 12-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster's aunts, Abby and Martha, have just retired, and Brewster is...
Calculating EVA Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $194,000 after income taxes. Capital employed equaled $2.6 million. Brewster is 40 percent equity and 60 percent 10-year bonds paying 7 percent interest. Brewster's marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5 percent rate on long-term Treasury bonds. Jonathan Brewster's aunts, Abby and Martha, have just retired, and Brewster is the...
Most questions answered within 3 hours.
-
Learning Outcomes:
Upon the successful completion of this module, you should
understand the following concepts:
Strategic...
asked 1 minute from now -
A 0.2m diameter ball with an initial velocity of 8m/s rolls up a
hill without slipping....
asked 6 minutes ago -
Identify four of the five major types of organizations within
the federal bureaucracy, and give examples...
asked 7 minutes ago -
The following data have been obtained
for the effect of solvent composition on the solubility of...
asked 7 minutes ago -
Our ability to see distinct edges as well as our errors in
contrast perceptions (e.g., seeing...
asked 26 minutes ago -
Two buckets of mass 17.1 kg and 11.3 kg are attached to the ends
of a...
asked 19 minutes ago -
A laser used in LASIK eye surgery produces 50 pulses per second.
The wavelength is 192...
asked 16 minutes ago -
Smith Inc. recently reported operating income of $2.75 million,
depreciation of $1.20 million, and had a...
asked 17 minutes ago -
A
nurse is trying to understand the structure and chain of command of
a healthcare organization....
asked 20 minutes ago -
A company is interested in estimating the costs of lunch
in their cafeteria. After surveying employees,...
asked 24 minutes ago -
A woman expends 94 kJ of energy in walking a kilometer. The
energy is supplied by...
asked 34 minutes ago -
you want to measure the gravitational acceleration at your
location. since g does not vary significantly...
asked 40 minutes ago