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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 $62 million of long-term debt is 8 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 $ 91,000,000 62,000,000 Current Liabilities $ 5,900,000 3,600,000 Before-Tax Operating Income $21,500,000 18,300,000 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).

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 $62 million of long-term debt is 8 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 $ 91,000,000 62,000,000 Current Liabilities $ 5,900,000 3,600,000 Before-Tax Operating Income $21,500,000 18,300,000 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).

Essentials Of Investments
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
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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 $62 million of long-term debt is 8 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 $ 91,000,000 62,000,000 Division Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. Real Estate Construction Current Liabilities $ 5,900,000 3,600,000 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). Before-Tax Operating Income $21,500,000 18,300,000 Economic value added (in millions)
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 $62 million of long-term debt is 8 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 $ 91,000,000 62,000,000 Division Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. Real Estate Construction Current Liabilities $ 5,900,000 3,600,000 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). Before-Tax Operating Income $21,500,000 18,300,000 Economic value added (in millions)
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 $87 million of long-term debt is 10 percent, and the company's combined federal and state income tax rates amount to 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 $183 million. Required: Calculate Golden Gate Construction Associates' weighted average cost of capital. Note: Round your answer to 1 decimal place. (i.e...123 should be entered as 12.3) Weighted-average cost of capital %
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 $87 million of long-term debt is 10 percent, and the company's combined federal and state income tax rates amount to 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 $183 million. Required: Calculate Golden Gate Construction Associates' weighted average cost of capital. Note: Round your answer to 1 decimal place. (i.e...123 should be entered as 12.3) Weighted-average cost of capital %
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