Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Ignacio, Inc., had after - tax operating income last year of $ 1 , 1 9 7 , 5 0 0 . Three sources of

Ignacio, Inc., had after-tax operating income last year of $1,197,500. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $5 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 fill in the blank 1
0.028
Unsecured bonds fill in the blank 2
0.042
Common stock fill in the blank 3
0.11
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.
fill in the blank 4
8.04
%
Calculate the total dollar amount of capital employed for Ignacio, Inc.
$fill in the blank 5
1,366,800
3. Calculate economic value added (EVA) for Ignacio, Inc., for last year. If the EVA is negative, enter your answer as a negative amount.
$fill in the blank 6
-169,300
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?
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. Most important question

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

Advanced Financial Accounting

Authors: Theodore E. Christensen, David M. Cottrell, Cassy JH Budd

11th edition

78025877, 978-0078025877

More Books

Students also viewed these Accounting questions

Question

Describe the difference between cost reporting and cost control.

Answered: 1 week ago

Question

If X has distribution function F(t) = 0, t Answered: 1 week ago

Answered: 1 week ago

Question

Is being able to work remotely important to you? Why or why not?

Answered: 1 week ago