60.1K

Verified Solution

Link Copied!

Calculating Weighted Average Cost of Capital and Economic Value Added $($EVA$)$

Ignacio, Inc., had after$-$tax operating income last year of $$1,196,500.$ Three sources of financing were used by the company: $$2$ million of mortgage bonds paying $4$ percent interest, $$4$ million of unsecured bonds paying $6$ percent interest, and $$9$ 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 $4$ percent. Ignacio, Inc., pays amarginal tax rate of $30$ percent.

Required:

Calculate the after$-$tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example, $4\mathrm{.}36\%$ would be entered as $"\mathrm{.}044".$

Mortgage bonds

Unsecured bonds

Common stock

$2.$ Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your final answer to four decimal places before converting to a percentage. For example, $\mathrm{.}06349$ would be rounded to $\mathrm{.}0635$ and entered as $"6\mathrm{.}35"$ percent.

$59.$

Calculate the total dollar amount of capital employed for Ignacio, Inc.

$3.$ Calculate economic value added $($EVA$)$ for Ignacio, Inc., for last year. If the EVA is negative, enter your answer as a negative amount.

Is the company creating or destroying wealth?

Answer & Explanation Solved by verified expert

See Answer