Argus Mining Company is financed by $2 million in debt (yield of 8%)and $1 million in equity (returning a rate of 22%).If we assume no taxes and perpetual cash flows, what level of earnings must Argus Mining Company earn in order to be considered a value-creating company?
A)$380,000
B)$400,000
C)$520,000
D)$630,000

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is 15% [= (8% x $2 million) + (22% x $1 million) / ($2 million + $1 million)]. To be considered a value-creating company, Argus Mining Company must earn more than $150,000 (= 15% x $1 million) in earnings.

Argus Mining Company Is Financed by $2 Million in Debt