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Delta Ltd. two sources of funds: long term debt with a market and book value of $13,500,000 issued at an interest rate of 12 percent and equity capital that has a market and book value of $9,000,000. The cost of equity capital is 5 percent, while the tax rate is 25 percent. Delta Ltd. operates three profit centres. Data for the past year are as follows: Sidea Movio Jumil Total Operating Income $1,620,000 $2,025,000 $3,442,500 Total Assets $6,750,000 $13,500,000 $20,250,000 Current Liabilities $337,500 $1,012,500 $2,025,000 Required: (A) What is the company's weighted-average cost of capital? (B) What is the EVA for each profit centre? (C) One criticism of the EVA method is that it is subject to manipulation (see page 905 of Datar et al. (2019)). Why would managers be interested in manipulating the EVA and how could they do it? Delta Ltd. two sources of funds: long term debt with a market and book value of $13,500,000 issued at an interest rate of 12 percent and equity capital that has a market and book value of $9,000,000. The cost of equity capital is 5 percent, while the tax rate is 25 percent. Delta Ltd. operates three profit centres. Data for the past year are as follows: Sidea Movio Jumil Total Operating Income $1,620,000 $2,025,000 $3,442,500 Total Assets $6,750,000 $13,500,000 $20,250,000 Current Liabilities $337,500 $1,012,500 $2,025,000 Required: (A) What is the company's weighted-average cost of capital? (B) What is the EVA for each profit centre? (C) One criticism of the EVA method is that it is subject to manipulation (see page 905 of Datar et al. (2019)). Why would managers be interested in manipulating the EVA and how could they do it?
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Answer rating: 100% (QA)
A Calculation of WeightedAverage Cost of Capital WACC To calculate the WACC we need to determine the proportion of debt and equity in the companys capital structure Debt Market value of longterm debt ... View the full answer
Related Book For
Entrepreneurial Finance
ISBN: 978-1305968356
6th edition
Authors: J. Chris Leach, Ronald W. Melicher
Posted Date:
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