All-Canadian, Ltd. is a multiproduct company with three divisions: Pacific Divis

Question

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 $402 million debt is 9 percent, and the company’s tax rate is 40 percent. The cost of All-Canadian’s equity capital is 12 percent. Moreover, the market value of the company’s equity is $603 million. (The book value of All-Canadian’s equity is $432 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 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 Before-Tax Operating
Income Current
Liabilities Total
Assets Pacific $ 14 $ 7 $ 72 Plains 47 6 280 Atlantic 50 10 482

Explanation / Answer

Let's first calculate weighthed average cost of capital

$7.2

Therefore wacc=9.36%

Now we calaculate EVA for each division

EVA = Investment center's after-tax operating income - ((Investment center's total asset - Investment center's current liabilities)*WACC)

Details After Tax Cost of Capital Capital Value Weighted cost Equity 12 $603 Million

$7.2

Debt 5.4(9*(1-.40) $402 Million $2.16 Total $1,005 million $9.36

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