N1 Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-termcapital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking intoaccount the fact that the interest payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunityrate of Golden Gate's investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden GateConstruction Associates. The interest rate on Golden Gate's $62 million of long-term debt is 7 percent, and the company's tax rate is30 percent. The cost of Golden Gate's equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gate'sequity is $85 milion.The company has two divisions: the real estate division and the construction division. The divisions' total assets, current liabilities, andbefore-tax operating income for the most recent year are as follows:Before-TaxOperatingInconeCurrentTotal Assets Liabilities$5,300,0003,300,000UOTSTATOReal estate$96,000,00063,100,000$21,800,000Construction18,900, 000Required: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 (l.e. 1,234,000should be entered as 1.234).)Economic valueadded (in millions)DivisionReal EstateIS10.642Construction9.997 O

EVA (economic value added) refers to the concept which computes the economic profit of a company.

s $62 million of long-t en Gate's equity capital is 15 percent. Moreover, the ns: the real estate division and the construction divis for the most recent year are as follows: Current * Liabilities $5,300,000 3,300,000 Before-Tax Operating Incone $21,800,000 18.900.000

s $62 million of long-t en Gate's equity capital is 15 percent. Moreover, the ns: the real estate division and the construction divis for the most recent year are as follows: Current * Liabilities $5,300,000 3,300,000 Before-Tax Operating Incone $21,800,000 18.900.000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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b. Discuss the effect on c and p, when there is an increase in: i. So ii. iii. O K
6
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