1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
masha68 [24]
3 years ago
6

Ignacio, Inc., had after-tax operating income last year of $1,197,000. Three sources of financing were used by the company: $2 m

illion 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 3 percent. Ignacio, Inc., pays a marginal tax rate of 30 percent.
Required:
1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example, 4.36% would be entered as ".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, .06349 would be rounded to .0635 and entered as "6.35" percent.
___________%
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?
Destroying
4. What if Ignacio, Inc., had common stock which was less risky than other stocks and commanded a risk premium of 5 percent? How would that affect the weighted average cost of capital?
Lower
What is the new EVA? In your calculations, round weighted average percentage cost of capital to four decimal places. If the EVA is negative, enter your answer as a negative amount.
$ ____________
Business
1 answer:
Serggg [28]3 years ago
4 0

Answer:

1) For cost of Mortgage Bonds(post tax): 0.04 * (1 - 0.3)=

0.04 * 0.7 = 0.028

For cost of Unsecured Bonds(post tax) : 0.06 * (1 - .3)=

0.06 * 0.7 = 0.042

For cost of Stock (using CAPM Model)

= Risk free Rate + Risk Premium

= 0.03 +0.08 = 0.110

2) Weighted Average Cost of Capital =\frac{(2 * 0.028) + (4*0.042) + (9*0.11)}{(2+4+9)}

= 0.0809

3. Economic Value Added

Operating Income after Tax = $1,197,000

Less : Cost of Capital= [(2,000,000 + 4,000,000 + 9,000,000) * 0.0809] = $1,213,500

Economic Value Added =

($1,197,000 - $1,213,500) = $ 405,500

4. If Risk premium is 5%:

Revised Cost of Stock = (0.03 + 0.05 ) 0.08

Therefore, Revised WACC =

\frac{(2 * 0.028) + (4*0.042) + (9*0.08)}{(2+4+9)}

= 0.0629

If gnacio, Inc., had common stock which was less risky than other stocks and commanded a risk premium of 5%, the WACC would be lower.

Revised EVA will be:

Operating Profit After Tax = $ 1,197,000

Cost of Capital :

[(2,000,000 + 4,000,000 + 9,000,000) * 0.0629] = $934,500

Economic Value Added = $262,500.

You might be interested in
At a nominal interest rate of i i convertible semiannually, an investment of 1,000 immediately and 1,500 at the end of the first
WINSTONCH [101]
At a nominal interest rate of i i convertible semiannually, an investment of 1,000 immediately and 1,500 at the end of the first year will accumulate to 2,600 at the end of the second year. Calculate i i.
8 0
2 years ago
Garcia company has 10,000 units of its product that were produced last year at a total cost of $150,000. the units were damaged
timurjin [86]

Answer and Explanation:

The computation of the incremental net income is shown below:

<u>Particulars    Sell          Process Further      Incremental Net income </u>

Sales        $20,000.00    $50,000.00        $30,000.00

          (10,000 units × $2)  (10,000 × $5)

Less:

Additional

Processing cost                 $18,000.00          $18,000.00

Total        $20,000.00      $32,000.00          $12,000.00

4 0
2 years ago
New issues of municipal short term notes are available in which form?
igomit [66]

Answer: book entry

Explanation:

A municipal bond, which is commonly referred to as a muni bond, can be defined as a bond that is issued by a particular territory or local government in order to finance public projects like airports, schools, roads, museums, seaports, and infrastructure. It should be noted that new issues of municipal short term notes are available in book entry form.

7 0
3 years ago
Larry’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $32,000 per year forever.
Harman [31]

Answer:

$444,444.44

Explanation:

Larry's life insurance corporation is trying to sell an investment policy that will pay you and your heirs a total amount of $32,000 per year

The required return on this investment is 7.2%

= 7.2/100

= 0.072

Since the cash flow is a perpetuity then, the amount that will be paid for the policy can be calculated as follows

PV= C/r

= $32,000/0.072

= $444,444.44

Hence the amount of money that will be paid for the policy is $444,444.44

4 0
3 years ago
According to Michael Porter, a firm’s _____ is composed of primary and secondary support activities that can lead to competitive
Anastasy [175]

Answer:

The correct word for the blank space is: value chain.

Explanation:

American economist Michael E. Porter (<em>born in 1947</em>) coined the term value chain to denote the interrelated operating activities businesses perform during the process of converting raw materials into finished products. The goal in value chain analysis is to find ways to add value to the product along each part of the process and do so at the lowest possible cost.

4 0
3 years ago
Other questions:
  • The Flintstone Construction Company delivers dirt and stone from local quarries to its construction sites. A new truck that was
    15·1 answer
  • Wealth creating transactions are more likely to occur a. ​With private property rights b. ​With contract enforcement c. Both a a
    6·1 answer
  • Liability coverage is _____.    
    13·2 answers
  • Another term for adding money to an account is _____ .
    13·1 answer
  • Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent a
    6·1 answer
  • When the Ideal State is higher than the Actual State, from the perspective of marketers, it is referred to as
    14·1 answer
  • A good negotiator knows
    8·1 answer
  • PLEASE HELP..... 20 POINTS!!
    13·1 answer
  • Sox Corporation purchased a 30% interest in Hack Corporation for $1,825,000 on January 1, 2021. On November 1, 2021, Hack declar
    9·1 answer
  • What is the difference between old and new institutional economics​
    10·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!