Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact that the interest payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunity rate of Golden Gate's investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden Gate's $66 million of long-term debt is 5 percent, and the company's tax rate is 30 percent. The cost of Golden Gate's equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gate's equity is $81 million. The company has two divisions: the real estate division and the construction division. The divisions' total assets, current liabilities, and before-tax operating income for the most recent year are as follows: Division Real estate Construction Total Assets $ 95,000,000 61,200,000 Current Liabilities $5,300,000 3,300,000 Before-Tax Operating Income $ 20,200,000 18,200,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. Note: Round your weighted-average cost of capital to 3 decimal places (i.e. .123). Enter your answers in millions rounded to 3 decimal places (i.e. $1,234,000 should be entered as $1.234).
Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact that the interest payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunity rate of Golden Gate's investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden Gate's $66 million of long-term debt is 5 percent, and the company's tax rate is 30 percent. The cost of Golden Gate's equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gate's equity is $81 million. The company has two divisions: the real estate division and the construction division. The divisions' total assets, current liabilities, and before-tax operating income for the most recent year are as follows: Division Real estate Construction Total Assets $ 95,000,000 61,200,000 Current Liabilities $5,300,000 3,300,000 Before-Tax Operating Income $ 20,200,000 18,200,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. Note: Round your weighted-average cost of capital to 3 decimal places (i.e. .123). Enter your answers in millions rounded to 3 decimal places (i.e. $1,234,000 should be entered as $1.234).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term
capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into
account the fact that the interest payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunity
rate of Golden Gate's investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate
Construction Associates. The interest rate on Golden Gate's $66 million of long-term debt is 5 percent, and the company's tax rate is
30 percent. The cost of Golden Gate's equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gate's
equity is $81 million.
The company has two divisions: the real estate division and the construction division. The divisions' total assets, current liabilities, and
before-tax operating income for the most recent year are as follows:
Division
Real estate
Construction
Division
Total Assets
$ 95,000,000
61,200,000
Real Estate
Construction
Current
Liabilities
$5,300,000
3,300,000
Required:
Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions.
Note: Round your weighted-average cost of capital to 3 decimal places (i.e. .123). Enter your answers in millions rounded to 3
decimal places (i.e. $1,234,000 should be entered as $1.234).
Economic
value added (in
millions)
Before-Tax
Operating
Income
$ 20,200,000
18,200,000
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