Calculating Weighted Average Cost of Capital and Economic Value Added (EVA) Ignacio, Inc., had after-tax operating income last year of $1,199,000. Three sources of financing were used by the company: $1 million of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 percent interest, and $11 mllion 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 0.028 0.042 0.11 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. 8.52 v 96 Calculate the total dollar amount of capital employed for Ignacio, Inc. 1,448,400 3. Calculate economic value added (EVA) for Ignacio, Inc., for last year. If the EVA is negative, enter your answer as a negative amount. 249,400 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. 541,600x Feedback Check My Work 1. After-tax cost = Interest rate-(Tax rate x Interest Rate) 2. To calculate the weighted average cost of capital, the company must identify all sources of invested funds. 3. EVA-After-tax operating income - (Weighted average cost of capital x Total capital employed) 4. See Cornerstone 10.3