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 $62 million of long-term
debt is 8 percent, and the company's tax rate is 20 percent. The cost of
Golden Gate's equity capital is 15 percent. Moreover, the market value
(and book value) of Golden Gate's equity is $86 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:
|
| Division | Total Assets | Current Liabilities | Before-Tax Operating Income | ||||||
| Real estate | $ | 94,000,000 | $ | 5,900,000 | $ | 21,000,000 | |||
| Construction | 60,500,000 | 3,900,000 | 18,100,000 | ||||||
| | |||||||||
| Required: |
|
Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. (Round
your "WACC" in percentage to 1 decimal place. Enter your answers in
millions rounded to 3 decimal places. Omit the "$" sign in your
response.)
|
| Division | Economic value added (in millions) |
| Real estate | $ 6.759  |
| Construction | $ 8.029 |
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