Part B Your company had after-tax operating income last year of $7,006,000. Three sources of financing...
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Part B Your company had after-tax operating income last year of $7,006,000. Three sources of financing were used by the company: $1 million of mortgage bonds paying 3 percent interest, $3 million of unsecured bonds paying 16 percent interest, and $1 million in common stock, which was considered to be no more or less risky than other stocks. (Over time, stockholders have received an average return that is 10 percentage points higher than the return on long-term government bonds.) The rate of return on long-term U.S. Treasury bonds is 9 percent. Your company pays a marginal tax rate of 33 percent. 1) Use for form below to calculate your EVA. Calculate the after-tax cost of each method of financing. Mortgage Bonds Unsecured Bonds Common Sto Calculate the weighted average cost of capital. Proportional Share of Mortgage Bonds Proportional Share of Unsecured Bonds Proportional Share of Common Stock Weighted Cost of Mortgage Bonds Weighted Cost of Unsecured Bonds Weighted Cost of Common Stock Weighted Average Cost of Capital Calculate the total dollar cost of capital employed. Calculate the EVA. 2) Interpret your EVA. EVA >0 WEALTH CREATED 2.01% 10.72% 19.00% 20.00% 60.00% 20.00% 0.40% 6.43% 3.80% 10.63% $ 6,474,300.00 Part B Your company had after-tax operating income last year of $7,006,000. Three sources of financing were used by the company: $1 million of mortgage bonds paying 3 percent interest, $3 million of unsecured bonds paying 16 percent interest, and $1 million in common stock, which was considered to be no more or less risky than other stocks. (Over time, stockholders have received an average return that is 10 percentage points higher than the return on long-term government bonds.) The rate of return on long-term U.S. Treasury bonds is 9 percent. Your company pays a marginal tax rate of 33 percent. 1) Use for form below to calculate your EVA. Calculate the after-tax cost of each method of financing. Mortgage Bonds Unsecured Bonds Common Sto Calculate the weighted average cost of capital. Proportional Share of Mortgage Bonds Proportional Share of Unsecured Bonds Proportional Share of Common Stock Weighted Cost of Mortgage Bonds Weighted Cost of Unsecured Bonds Weighted Cost of Common Stock Weighted Average Cost of Capital Calculate the total dollar cost of capital employed. Calculate the EVA. 2) Interpret your EVA. EVA >0 WEALTH CREATED 2.01% 10.72% 19.00% 20.00% 60.00% 20.00% 0.40% 6.43% 3.80% 10.63% $ 6,474,300.00
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Cornerstones of Managerial Accounting
ISBN: 978-0176530884
2nd Canadian edition
Authors: Maryanne M. Mowen, Don Hanson, Dan L. Heitger, David McConomy, Jeffrey Pittman
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