Dalton Industries, Inc., had after-tax operating income last year of $1,996,500. Three sources of financing were used by the company: $4 million of mortgage bonds paying 8 percent interest, $5 million of unsecured bonds paying 10 percent interest, and $11 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 6 percent. Dalton Industries, Inc., pays a marginal tax rate of 40 percent.

Required:
1. Calculate the after-tax cost of each method of financing.
2. Calculate the weighted average cost of capital for Dalton, Industries, Inc. Calculate the total dollar amount of capital employed for Dalton Industries, Inc.
3. Calculate economic value added (EVA) for Dalton Industries, Inc., for last year. Is the company creating or destroying wealth?
4. What if Dalton Industries, 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? How would it affect EVA?LO1