Ignacio, Inc., had after-tax operating income last year of $1,198,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent nterest, $4 million of unsecured bonds paying 6 percent interest, and $11 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 deci a values rounded to three places. For examp e, 436% would be entered as .044 Mortgage bonds Unsecured bonds Common stock 0.028 0.042 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. 8.44 % Calculate the total dollar amount of capital employed for Ignacio, Inc. 1,434,800 3. Calculate economic value added (EVA) for Ignacio, Inc., for last year. If the EVA is negative, enter your answer as a negative amount. -236,800 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? Lower 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. -9,000X Raddington Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x1 by acquiring one of its suppliers of alloy steel plates, Keimer Steel Company. To manage the two separate businesses, the operations of Keimer are reported separately as an investment center Raddington monitors its divisions on the basis of both unit contribution and return on average investment R wit m est ment de ne as average operating assets employed. Management bonuses are determined on ROI. All investments in operating assets are expected to earn a minimum return of 20 percent before income taxes. Keimer's cost of goods sold is considered to be entirely variable, while the division's administrative expenses are not dependent on volume. Selling expenses are a mixed cost with 30 percent attributed to sales volume. Keimer contemplated a capital acquisition with an estimated ROI of 22.40 percent; however, division management decided against the investment because it believed that the investment would decrease Keimer's overall ROI The 20x2 operating statement for Keimer follows. The division's operating assets employed were $13 8 SO at November 30 2 x 2 apercent increase over the 20 d ear- end balance Keimer Steel Company Operating Statement For the Year Ended November 30, 20x2 Sales revenue $25,778,000 Less expenses Cost of goods sold Administrative expenses Selling expenses $16,240,140 3,868,600 2,699,000 22,807,740 Operating income before income taxes $2,970,260 Required 1. Calculate the unit contribution for Keimer Steel Company if 1,222,400 units were produced and sold during the year ended November 30, 20x2. Round your answer to the nearest cent. .14 per unit 2. Calculate the following performance measures for 20x2 for Keimer Steel Company a. Pretax return on average investment in operating assets employed (ROI). Round your percentage answer to two decimal places (for example, the decimal 10555 would be entered as "10.56" percent). 22.91 x % b. Residual income calculated on the basis of average operating assets employed. 377,342x 3. Explain why the management of Keimer Steel Company would have been more likely to accept the contemplated capital acquisition if residual income rather than ROI were used as a performance measure The investment would have increased both the division's residual income and the management bonuses. 4. Keimer Steel Company is a separate investment center within Raddington Industries. Identify several items that Keimer should control if it is to be evaluated fairly by either the ROI or residual income performance measures. (CMA adapted) Keimer must be able to control all items related to profits and investment. V