Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.] 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 $418 million debt is 9 percent, and the company's tax rate is 30 percent. The cost of All- Canadian's equity capital is 10 percent. Moreover, the market value of the company's equity is $627 million. The book value of All-Canadian's equity is $442 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 Before-Tax Operating Income $12 4 2 45 Total Assets $ 68 318 498 Current Liabilities Division Pacific Plains Atlantic 10

Explanation / Answer

WACC= We.Ke+Wd.Kd(1-t)

where, We= E/(E+D)

Wd=D/(E+D)

Total market value of Equity (E) $627 million

Total market value of Debt (D) $418 million

Cost of Equity (Ke) 10%

Cost of Debt (Kd) 9%

tax rate(t) 30% or 0.3

Now placing the values in the formula

WACC= (627/(627+418))*10 + (418/(627+418))*9*(1-0.3)

=8.52%

Formula for Economic Value Added

NOPAT - (Total Assets - Current Liabilities) * WACC.

Division NOPBT NOPAT (NOPBT*(1-t)) Total Asset-current liability WACC(%) EVA (in $M) Pacific 12 8.4 61 8.52 3.2028 Plains 42 29.4 312 8.52 2.8176 Atlantic 45 31.5 488 8.52 -10.0776

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