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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 $404 million debt is 9 percent, and the company’s tax rate is 30 percent. The cost of All-Canadian’s equity capital is 10 percent. Moreover, the market value of the company’s equity is $606 million. (The book value of All-Canadian’s equity is $434 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.

Division	Before-Tax Operating Income					Current Liabilities					Total Assets
Pacific		$	18				$	8				$	74
Plains			49					7					304
Atlantic			43					11					487

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).)

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.)

Answer 1

Debt = 404 million

Equity = 606 million

Weight of debt = 404 1010 = 0.40

Weight of equity = 606 1010 = 0.60

WACC = Weight of debt x Cost of debt x (1 - tax rate) + Weight of equity x Cost of equity

= 0.40 x 9% x (1 - 30%) +0.60 x 10%

WACC = 8.52%

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Economic Value Added (EVA) = Net Operating Profit After Taxes (NOPAT) - Invested Capital x WACC

Pacific Division:

NOPAT = Before tax operating income x (1 - tax rate) = 18 x (1 - 30%) = 12.60

Invested capital = Total assets - C. Liabilities = 74 - 8 = 66

EVA = 12.60 - 66 x 8.52% = 12.60 - 5.62 = 6.98

Plains Division:

NOPAT = Before tax operating income x (1 - tax rate) = 49 x (1 - 30%) = 34.30

Invested capital = Total assets - C. Liabilities = 304 - 7 = 297

EVA = 34.30 - 297 x 8.52% = 34.30 - 25.30 = 9.00

Atlantic Division:

NOPAT = Before tax operating income x (1 - tax rate) = 43 x (1 - 30%) = 30.10

Invested capital = Total assets - C. Liabilities = 487 - 11 = 476

EVA = 30.10 - 476 x 8.52% = 30.10 - 40.56 = -10.46