Golden Gate Construction Associates. The company has two divisions: the real est

Question

Golden Gate Construction Associates. 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: DivisionTotal AssetsCurrent LiabilitiesBefore-Tax Operating IncomeReal estate .......................................................................$100,000,000$6,000,000$20,000,000Construction ....................................................................60,000,0004,000,00018,000,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associ-ates’ divisions. (You will need to use the weighted-average cost of capital, which was computed in the preceding exercise.) WACC is 11.4%

Explanation / Answer

EVA Calculation Amt s in $ Division Total Assets Current Laibilities Before Tax Operating income Invested Capital=Total Assets-non interest bearing current liabilities WACC Invested Capital*WACC= Net Operating Income-Invested capital*WACC= Real Estate            100,000,000      6,000,000 20,000,000          94,000,000 11.4%       10,716,000       9,284,000 Construction              60,000,000      4,000,000 18,000,000          56,000,000 11.4%          6,384,000    11,616,000 No Tax rate is given , using net operating income before tax for EVA calculation EVA= Net Operating Income after Tax- Invested Capital*WACC Division EVA $ Real Estate $      9,284,000.00 Construction $    11,616,000.00

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