Question
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 $68 million of long-term debt is 7 percent, and the companys tax rate is 20 percent. The cost of Golden Gates equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gates equity is $85 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 | $ | 96,000,000 | $ | 6,000,000 | $ | 20,500,000 | ||||||||||||||
| Construction | 62,800,000 | 3,500,000 | 18,100,000 | |||||||||||||||||
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IT Auditing And Sarbanes Oxley Compliance Key Strategies For Business Improvement
Authors: Dimitris N. Chorafas
1st Edition
036738650X, 978-0367386504
