Stonex Corp, whose tax rate is 35%, has two sources of funds: long-term debt with a market value of $6,200,000 and an interest rate of 9%, and equity capital with a market value of $14,000,000 and a cost of equity of 13%. Stonex has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:

Calculate EVA for the Gold Division. (Round intermediary calculations to four decimal places.)
A) -$56,290
B) $56,290
C) $1,040,000
D) $983,710

Question

Stonex Corp, whose tax rate is 35%, has two sources of funds: long-term debt with a market value of $6,200,000 and an interest rate of 9%, and equity capital with a market value of $14,000,000 and a cost of equity of 13%. Stonex has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:

Calculate EVA for the Gold Division. (Round intermediary calculations to four decimal places.)

Calculate EVA for the Gold Division. (Round intermediary calculations to four decimal places.)
A) -$56,290 
B) $56,290 
C) $1,040,000 
D) $983,710

Quizplus · Accepted Answer

WACC = [($6,200,000 × (1 - 0.35) × (0.09)) + ($14,000,000 × 0.13)] / ($6,200,000 + $14,000,000) = 0.1081
EVA = ($1,600,000 × (1 - 0.35)) - (($12,000,000 - $2,900,000) × 0.1081) = $56,290

Stonex Corp, Whose Tax Rate Is 35%, Has Two Sources