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
ABC Corporation reports the following information:
Tpy6a [65]

Answer:

$480,000

Explanation:

Data provided as per the question below:-

Net income = $380,000

Depreciation = $70,000

Decrease in accounts receivable = $30,000

The computation of cash provided by operating activities is shown below:-

= Net income + Depreciation + Decrease in accounts receivable

= $380,000  + $70,000  + $30,000

= $480,000

Therefore we applied the above formula.

7 0
2 years ago
John and Mary Billings own a condominium with an assessed value of $110,000. If the tax rate is 25 mills per $1.00 of assessed v
Murljashka [212]

Answer:

option (D) $ 2,750

Explanation:

Data provided :

Assessed value of John and Mary Billings = $ 110,000

Tax rate = 25 mills per  $ 1.00

or

Tax rate in dollars = 25/1000 = 0.025 / $ 1.00

therefore,

Tax they have to pay = Assessed value of John and Mary Billings × Tax rate

or

Tax to be paid = $ 110,000 × 0.025 = $ 2,750

Hence,

the correct answer is option (D) $ 2,750

7 0
3 years ago
In most organizations, who is primarily responsible for appraising an employee's performance
ivanzaharov [21]
It is and should be the managers job to do that
8 0
3 years ago
Interest is the rate earned from a <br> stock share <br> savings account <br> deposit <br> loan
Law Incorporation [45]

Answer:

savings account

deposit

Explanation:

Interest is the money earned when deposits or savings stay in a financial institution for some time. Financial institutions such as commercial banks pay interests to encourage the public to save and keep deposits in their bank accounts. Interest earned is determined by the amount of deposit or saving, the interest rate offered, and the duration of time the money stayed in the bank.

A high-interest rate is attractive to the public as it earns more interest. Financial institutions compete for deposits and saving by offering better interest rates.

4 0
3 years ago
In which type of organizational design do middle managers do the primary information processing and communication function, tell
slega [8]

Answer:

The correct answer is letter "C": Hierarchical.

Explanation:

Hierarchical organizations are bureaucratic entities where the decisions are taken by high-rank executives and the main instructions about how the business should be handled come from managers to employees with less command. Messages, as well, have a top-down flow. Hierarchical companies tend to be slow in their processes because the information must flow between different layers of the entity.

8 0
3 years ago
Other questions:
  • Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000 shares of no-par 8% preferred stock with a state
    15·1 answer
  • Gilchrist Corporation bases its predetermined overhead rate on the estimated machine-hours for the upcoming year. At the beginni
    15·1 answer
  • He should sell at a cheaper price on the website to attract more customers true or false?​
    5·1 answer
  • Taylor Equipment Repair Service is owned by Jason Taylor. Cash $ 33,700 Supplies 5,780 Accounts Receivable 12,600 Equipment 77,4
    6·1 answer
  • Nguyen was trying to decide between purchasing the common stock shares of McAlister Manufacturing, or preferred shares of the sa
    8·1 answer
  • roarie brothers farm a seed company specializing in seed corn. at their weekly meeting they tried to calculate the portion of th
    5·2 answers
  • Which sentences in the passage correctly describe the intermediaries in the distribution process?
    5·2 answers
  • The existence of money leads to a. greater specialization and to a higher standard of living. b. neither greater specialization
    15·1 answer
  • Do you agree with the idea of NBA teams requiring fans to place deposits for season tickets for the following year? What about t
    14·1 answer
  • The sales price, acquisition costs, and capital improvement costs (such as renovations or additions) of a property combine to ma
    15·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!