Required information The following information applies to the questions displaye

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 $410 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 $615 million. (The book value of All-Canadian's equity is $441 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 $16 45 48 Current Liabilities Division Pacific Plains Atlantic Total Assets $ 67 317 497 Required 1. Compute All-Canadian's weighted-average cost of capital (WACC). (Do not round intermediate calculations. Round your final answer to 2 decimal places (ie., .1234 should be entered as 12.34).) hted-average cost of capital

Explanation / Answer

1.All-Canadians Weighted average cost of capital = 9.72%

Value of Debt       = $410 Million

Value of Equity    = $615 Million

Total Value          = $1025 Million

Cost of Debt         = 6.3% (9% x 0.70)

Cost of Equity      = 12%

Weighted average cost of capital

= 6.3($410/$1025) + 12% ($615/$1025)

= 9.72%

2.Economic Value Added

EVA= Net Operating Profit after Tax – [ WACC x Invested Capital ]

PACIFIC DIVISION

= $1,60,00,000 (1-0.30) – [ ($6,70,00,000 - $80,00,000) x 9.72%]                    

= $54,65,200

PLAINS DIVISION

= $4,50,00,000 (1-0.30) – [ ($31,70,00,000 - $70,00,000) x 9.72%]                           

= $13,68,000

ATLANTIC DIVISION

= $4,80,00,000 (1-0.30) – [ ($49,70,00,000 - $1,10,00,000) x 9.72%]                        

= - $1,36,39,200 (Negative)

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