Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost

Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact that the interest payments are tax deductible. The cost of Golden Gates equity capital is the investment opportunity rate of Golden Gates investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden Gates $60 million of long-term debt is 10 percent, and the companys tax rate is 40 percent. The cost of Golden Gates equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gates equity is $90 million. The company has two divisions: the real estate division and the construction division. The divisions total assets, current liabilities, and before-tax operating income for the most recent year are as follows:

Division Total Assets Current Liabilities Before-Tax Operating Income
Real estate $ 100,000,000 $ 6,000,000 $ 20,000,000
Construction 60,000,000 4,000,000 18,000,000

Required:

Calculate the economic value added (EVA) for each of Golden Gate Construction Associates divisions.

(Round your weighted-average cost of capital to 3 decimal places (i.e. .123). Enter your answers in millions rounded to 3 decimal places (i.e. 1,234,000 should be entered as 1.234)).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Information For Decisions

Authors: Robert Ingram, Thomas L. Albright, Bruce A. Baldwin, John Hill

1st Edition

0538815388, 978-0538815383

More Books

Students also viewed these Accounting questions

Question

=+Differentiate the key characteristics of a personal brand

Answered: 1 week ago

Question

1. What are the benefi ts of studying communication?

Answered: 1 week ago

Question

=+Discuss the key benefits and challenges of a personal brand

Answered: 1 week ago