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 $69 million of long-term debt is 6 percent, and the company's tax rate is 40 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 $80 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: Before-Tax Current Liabilities Operating Income Total Assets Division Real estate Construction $91,000,000 67,600, 000 $5,700,000 3,900,000 $20,500,000 18,800,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. (Round your weighted- average cost of capital should be entered as 1.234).) 3 decimal places (i.e. 123). Enter your answers in millions rounded to 3 decimal places (i.e. 1,234,000 Economic value added (in millions) Division < Prev 5 of 7 Next >
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 $69 million of long-term debt is 6 percent, and the company's tax rate is 40 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 $80 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: Before-Tax Current Liabilities Operating Income Total Assets Division Real estate Construction $91,000,000 67,600, 000 $5,700,000 3,900,000 $20,500,000 18,800,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. (Round your weighted- average cost of capital should be entered as 1.234).) 3 decimal places (i.e. 123). Enter your answers in millions rounded to 3 decimal places (i.e. 1,234,000 Economic value added (in millions) Division < Prev 5 of 7 Next >
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 5P
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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 $69 million of long-term debt is 6 percent, and the company's tax rate is
40 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 $80 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:
Before-Tax
Current
Operating
Division
Real estate
Total Assets
Liabilities
Income
$91,000,000
67,600,000
$5,700,000
3,900,000
$20,500,000
18,800,000
Construction
Required:
Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. (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)
Division
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