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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 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

1.All-Canadians Weighted average cost of capital =8.52%

Value of Debt                = $404 Million

Market Value of Equity = $606 Million

Total Value                    = $1010 Million

Cost of Debt         = 6.3% (9% x 0.70)

Cost of Equity      = 10%

Weighted average cost of capital = 6.3($404/$1010) + 10% ($606/$1010) = 8.52%

2.Economic Value Added

EVA= Net Operating Profit after Tax – [WACC x Invested Capital]

PACIFIC DIVISION

= $1,80,00,000 (1-0.30) – [ ($7,40,00,000 - $80,00,000) x 8.52%]                    

= $69,76,800

PLAINS DIVISION

= $4,90,00,000 (1-0.30) – [ ($304000000 - $7000000) x 8.52%]                       

= $89,95,600

ATLANTIC DIVISION

= $4,30,00,000 (1-0.30) – [ ($487000000 - $11000000) x 8.52%]                     

= - $1,04,55,200 (Negative)