Part C
Your company had after-tax operating income last year of $3,710,000. Three sources of
financing were used by the company: $1 million of mortgage bonds paying 17 percent
interest, $8 million of unsecured bonds paying 17 percent interest, and $8 million in
common stock, which was considered to be no more or less risky than other stocks. (Over
time, stockholders have received an average return that is 8 percentage points higher than
the return on long-term government bonds.) The rate of return on long-term U.S. Treasury
bonds is 8 percent. Your company pays a marginal tax rate of 32 percent.
1) Use for form below to calculate your EVA.
Calculate the after-tax cost of each method of financing.
Mortgage Bonds
Unsecured Bonds
Common Stock
Calculate the weighted average cost of capital.
Proportional Share of Mortgage Bonds
Proportional Share of Unsecured Bonds
Proportional Share of Common Stock
Weighted Cost of Mortgage Bonds
Weighted Cost of Unsecured Bonds
Weighted Cost of Common Stock
Weighted Average Cost of Capital
Calculate the total dollar cost of capital employed.
Calculate the EVA.
2) Interpret your EVA.
