[The following information applies to the questions displayed below.] All-Canadi

Question

[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 8 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 $624 million. (The book value of All-Canadian’s equity is $430 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.

Compute All-Canadian’s weighted-average cost of capital (WACC). (Do not round intermediate calculations. Round your final answer to 2 decimal places (i.e., .1234 should be entered as 12.34).)

Division Before-Tax Operating
Income Current
Liabilities Total
Assets Pacific $ 17 $ 9 $ 75 Plains 50 8 305 Atlantic 42 12 488

Compute All-Canadian’s weighted-average cost of capital (WACC). (Do not round intermediate calculations. Round your final answer to 2 decimal places (i.e., .1234 should be entered as 12.34).)

Explanation / Answer

WACC = 9.50%

cost market Value Market value weights cost * market value weights Equity 12% 624 624/1024 = .6094 12*.6094 = 7.31 After tax Debt 8(1-.30)= 5.6% 400 400/1024= .3906 5.6*.3906= 2.19 1024 9.50%

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.