Weighted-Average Cost of Capital; Economic Value Added (EVA) (LO 2)
All-Canadian, Ltd. is a multiproduct company with three divisions: Pacific Division, Plains Division, and Atlantic Division. The company has two sources of long-term capital: debt and equity. The interest rate on All-Canadian’s $400 million debt is 9 percent, and the company’s tax rate is 30 percent. The cost of All-Canadian’s equity capital is 12 percent. Moreover, the market value of the company’s equity is $600 million. (The book value of All-Canadian’s equity is $430 million, but that amount does not reflect the current value of the company’s assets or the value of intangible assets.)
The following data (in millions) pertain to All-Canadian’s three divisions.
Division | Operating Income | Current Liabilities | Total Assets |
Pacific | $14 | $6 | $ 70 |
Plains | 45 | 5 | 300 |
Atlantic | 48 | 9 | 480 |
Required:
1. Compute All-Canadian’s weighted-average cost of capital (WACC).
2. Compute the economic value added (or EVA) for each of the company’s three divisions.
3. What conclusions can you draw from the EVA analysis?.
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