Chelsea Construction Associates, a real estate developer and building contractor in Manhattan, has two sources of long-term capital: debt and equity. The firm’s cost of issuing debt is the after-tax cost of the interest payments on the debt, considering the fact that the interest payments are tax deductible.

Chelsea’s cost of equity capital is the investment opportunity rate of Chelsea’s investors, that is, the rate they could earn on investments of similar risk to that of investing in Chelsea Construction Associates.

The interest rate on Chelsea’s $60 million of long-term debt is 10 percent, and the company’s tax rate is 40 percent. Chelsea’s cost of equity capital is 14 percent. Moreover, its market value (and book value) of equity is $90 million.

Required Calculate Chelsea Construction Associates’ weighted-average cost of capital.

Refer to the data in the preceding exercise for Chelsea Construction Associates. The company has two divisions, real estate and construction. The divisions’ total assets, current liabilities, and before-tax operating income for the most recent year follow:

Total Current Before-Tax Division Assets Liabilities Operating Income RealkeStatem ertiterese :ter eee $100,000,000 $6,000,000 $20,000,000 CONSUMIGTIONM ee eeeeee e e 60,000,000 4,000,000 18,000,000 Required Calculate the economic value added for each of Chelsea Construction Associates’ divisions. (You will need to use the weighted-average cost of capital, which was computed in the preceding exercise.)