OUGH 8. American Water Company, Inc. has THR debt with a market and equity capit
ID: 2557731 • Letter: O
Question
OUGH 8. American Water Company, Inc. has THR debt with a market and equity capital that has a American operating incomes, total assets, and c two sources of funds: long-term f 10%, and million) es in the following locations with the following urrent liabilities. The cost of equity is 24%, while book value of S10 million issued at an interest rate o market value of $10 million (book value of 58 Water Company has subsidiari the combined income tax rate is 40%; Virginia North Carolina South Carolina Operating Income $1,960,000 $2,200,000 $3,040,000 Assets Current Liabilities $8,000,000 $16,000,000 $24,000,000 $500,000 $600,000 $800,000 6. What is the EVA for Virginia? a. $52,740 b. $27,460 c. $92,540 d. $51,000 7. What is the NOPAT for North Carolina? a. $1,350,580 b. $1,220,000 c. $1,320,000 d. $1,305,000 8. What is WACC?Explanation / Answer
6. EVA (Economic Value Added) for Virginia = NOPAT - Invested Capital x WACC
Invested Capital = Total Assets - Current liabilities = 8,000,000 - 500,000 = 7,500,000
NOPAT = Operating income x (1 - Tax rate)= 1,960,000 x (1 - 0.4) = 1,176,000
WACC = Cost of Equity x (Total equity/Total capital) + Cost of Debt (1-tax rate) x (Total debt/Total capital)
= 24% x (10 million/20 million) + 10% (1-0.4) x (10 million/20 million) = 12% + 3% = 15%
Note: We should take the market value of equity and not book value.
Therefore, EVA = 1,176,000 - 7,500,000 x 15% = 51,000 (Option D)
7. NOPAT for North Carolina = Assets - Current liab = 16,000,000 - 600,000 = 15,400,000
8. WACC = 15% (As calculated above)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.