Golden Gate Construction Associates, a real estate developer andbuilding contractor in San Francisco, has two sources of long-termcapital: debt and equity. The cost to Golden Gate of issuing debtis the after-tax cost of the interest payments on the debt, takinginto account the fact that the interest payments are taxdeductible. The cost of Golden Gate’s equity capital is theinvestment opportunity rate of Golden Gate’s investors, that is,the rate they could earn on investments of similar risk to that ofinvesting in Golden Gate Construction Associates. The interest rateon Golden Gate’s $60 million of long-term debt is 10 percent, andthe company’s tax rate is 40 percent. The cost of Golden Gate’sequity capital is 15 percent. Moreover, the market value (and bookvalue) of Golden Gate’s equity is $90 million.
The company has two divisions: the real estate division and theconstruction division. The divisions’ total assets, currentliabilities, and before-tax operating income for the most recentyear are as follows:
| Division | Total Assets | Current Liabilities | | Before-Tax Operating Income | |
| Real estate | | $ | 100,000,000 | | | $ | 6,000,000 | | | $ | 20,000,000 | | |
| Construction | | | 60,000,000 | | | | 4,000,000 | | | | 18,000,000 | | |
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Required:
Calculate the economic value added (EVA) for each of Golden GateConstruction Associates’ divisions. (Round yourweighted-average cost of capital to 3 decimal places (i.e. .123).Enter your answers in millions rounded to 3 decimal places (i.e.1,234,000 should be entered as 1.234)).
