Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.) All-Canadian, Ltd. is a multiproduct company with three divisions: Pacific Division, Plains Division, and Atlantic Division. The company has two sources of long-term capital: debt and equity. The interest rate on All-Canadian's $400 million debt is 9 percent, and the company's tax rate is 30 percent. The cost of All-Canadian's equity capital is 12 percent. Moreover, the market value of the company's equity is $600 million. (The book value of All-Canadian's equity is $440 million, but that amount does not reflect the current value of the company's assets or the value of intangible assets.) The following data (in millions) pertain to All-Canadian's three divisions. Before-Tax Operating Income $15 Current Liabilities Division Pacific Plains Atlantic Total Assets $ 75 280 495 40 43 2. Compute the economic value added (or EVA) for each of the company's three divisions. (Do not round intermediate calculations. Enter your final answers in dollars and not millions.) Division Economic Value Added

Explanation / Answer

EVA = NOPAT – (WACC * capital invested)            where NOPAT = Net Operating Profits After Tax WACC = Weighted Average Cost of Capital All Canadian Ltd. Weighted average cost of capital Details After Tax Cost of Capital Capital Value Weighted Cost Equity 12 $600 Million $7.20 Debt(9*0.70) 6.3 $400 Million $2.52 Total $1,000 Million $9.72 Economic Value Added Pacific Plains Atlantic Capital invested (beginning of year)* $69 $275 $486 WACC 9.72% 9.72% 9.72% Finance Charge $6.71 $26.73 $47.24 NOPAT($) $15 $40 $43 Economic Value Added $8 $13 ($4)

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