Example: Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after- tax income of $768,000. Fill in the following table to calculate the weighted average percent cost of capital. (Round all decimals to four significant digits.) Amount Percent After-Tax Cost Weighted Cost Mortgage bonds $3,000,000 Unsecured bonds 2,500,000 Common stock 4,500,000
Example: Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after- tax income of $768,000. Fill in the following table to calculate the weighted average percent cost of capital. (Round all decimals to four significant digits.) Amount Percent After-Tax Cost Weighted Cost Mortgage bonds $3,000,000 Unsecured bonds 2,500,000 Common stock 4,500,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
100%
Economic Value Added (EVA)
![Example: Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured
bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The
company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after-
tax income of $768,000. Fill in the following table to calculate the weighted average percent cost of capital. (Round all decimals to four
significant digits.)
Amount
Percent
After-Tax Cost Weighted Cost
Mortgage bonds
$3,000,000
Unsecured bonds
2,500,000
Common stock
4,500,000
Total
The weighted average percent cost of capital is
or
%.
Total cost of capital employed is $
EVA is $](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4ebf2759-59a4-4687-9e64-2cf88860377f%2F5e838315-f93a-47e4-8527-677809e4e128%2Fwrh8k3k_processed.png&w=3840&q=75)
Transcribed Image Text:Example: Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured
bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The
company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after-
tax income of $768,000. Fill in the following table to calculate the weighted average percent cost of capital. (Round all decimals to four
significant digits.)
Amount
Percent
After-Tax Cost Weighted Cost
Mortgage bonds
$3,000,000
Unsecured bonds
2,500,000
Common stock
4,500,000
Total
The weighted average percent cost of capital is
or
%.
Total cost of capital employed is $
EVA is $
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