Question
For questions 14 and 15. Donegal, Inc., has decided to use EVA to evaluate its performance. Last year, Donegal had after-tax operating income of $900,000.
For questions 14 and 15.
Donegal, Inc., has decided to use EVA to evaluate its performance.
Last year, Donegal had after-tax operating income of $900,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 9 percent interest, $3 million of unsecured bonds paying 11 percent interest, and $10 million in common stock, which was considered to be relatively more risky than other stocks, and had a risk premium of 8 percent. Donegal, Inc., pays a marginal tax rate of 40 percent.
14. Calculate the weighted average cost of capital for Donegal, Inc. (round to nearest 3 decimal
points).
2,000,000
.13 x .09 (1 - .04)
= .0072
3,000,000
.20 x .11 (1 - .04)
= .0132
10,000,000
.67 x .14
= .0938
why 10M need multiply 0.14
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