Golden Gate Construction Associates- a real estate developer and build.docx

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Golden Gate Construction Associates has two sources of capital - debt and equity. It has $66 million in long-term debt at 8% interest and $85 million in equity. The company has two divisions - real estate and construction. The divisions' total assets, current liabilities, and before-tax operating income for the most recent year are provided. The weighted average cost of capital is calculated to determine the economic value added for each division.

Educação

Golden Gate Construction Associates, a real estate developer and building contractor in San
Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of
issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact
that the interest payments are tax deductible. The cost of Golden Gate's equity capital is the
investment opportunity rate of Golden Gate's investors, that is. the rate they could earn on
investments of similar risk to that of investing in Golden Gate Construction Associates. The
interest rate on Golden Gate's $66 million of long-term debt is 8 percent, and the company's tax
rate is 30 percent. The cost of Golden Gate's equity capital is 10 percent. Moreover, the market
value (and book value) of Golden Gate's equity is $85 million. The company has two divisions:
the real estate division and the construction division. The divisions' total assets, current
liabilities, and before-tax operating income for the most recent year are as follows: Required:
Calculate the economic value added (EVA) for each of Golden Gate Construction Associates'
divisions. (Round your weighted-average cost of capital to 3 decimal places (i.e. .123). Enter
your answers in millions rounded to 3 decimal places (i.e. 1.234).
Solution
Answer:
Post tax cost of debt = 8%(1-0.3)= 5.6%,
Cost of equity = 10%
$ Weight Cost Weighted cost
Equity 8,50,00,000 0.562914 10% 5.629%
Debt 6,60,00,000 0.437086 5.60% 2.448%
Total 15,10,00,000 WACC = 8.077%

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