Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Calculating Weighted Average Cost of Capital and Economic Value Added (EVA) Ignacio, Inc., had after-tax operating income last year of $1,196,000. Three sources of
Calculating Weighted Average Cost of Capital and Economic Value Added (EVA) Ignacio, Inc., had after-tax operating income last year of $1,196,000. Three sources of financing were used by the company: $1 million of mortgage bonds paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $10 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 puld be rounded to .0635 and entered as "6.35" percent. % Calculate the total dollar amount of capital employed for Ignacio, Inc.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started