Question
Tasty Claws Ltd (TCL) operates a chain of seafood restaurants across the Asia Pacific region. Since starting operations 10 years ago, the company has obtained
Tasty Claws Ltd (TCL) operates a chain of seafood restaurants across the Asia Pacific region. Since starting operations 10 years ago, the company has obtained funds from two sources: long-term borrowings from financial institutions (debt) and several share issues (equity). The cost of TCL of issuing debt is the after-tax cost of the interest payments on the borrowings (interest payment are tax deductible). The cost of TCLs equity capital is the investment opportunity rate of TCLs investors. That is, it is the rate that they could earn on investments of similar risk to that of investing in TCL. The interest rate on TCLs $80 million of long-term debt is 9 per cent and the companys tax rate is 40 per cent. The cost of TCLs equity capital is 14 per cent. The market value (and book value) of TCLs equity is $120 million.
Tasty Claws Ltd has two divisions, the properties division, and the food service division. The following data relate to the most recent year.
Division | Total assets | Current liabilities | Profit before tax |
Properties | $145,000,000 | $3,000,000 | $29,000,000 |
Food Service | 64,000,000 | 6,000,000 | 15,000,000 |
Required:
Calculate the weighted average cost of capital (WACC) for Tasty Claws Ltd. Assume that the market value of debt equals the nominal value of debt.
Calculate the economic value added (EVA) for each of the divisions. Capital employed can be calculated as the difference between total assets and current liabilities.
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