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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 $400 million debt is 8 percent, and the company’s tax rate is 30 percent. The cost of All-Canadian’s equity capital is 12 percent. Moreover, the market value of the company’s equity is $624 million. (The book value of All-Canadian’s equity is $430 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

$

17

$

9

$

75

Plains

50

8

305

Atlantic

42

12

488

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.)

Division	Economic Value Added
Pacific
Plains
Atlantic

Answer 1

Answer:-

Economic Value added = Net operating profit after tax - (WACC*Capital investment)

Net operating ptofit after tax = Operating profit * (1-0.3)

Pacific - 17*0.7 = 11.9

Plains - 50*0.7 = 35

Atlantic - 42*(1-0.3) = 42*0.7 = 29.4

WACC = E/V * Ke + D/V * Kd * (1 – Tax Rate)

WACC = 624/(624+400) * 0.12 + 400/(624+400)* 0.08 (1-0.3)

WACC= 0.073125+0.021875

WACC= 0.095

WACC= 9.5%

EVA

Pacific - 11.9 - (0.095*66) = 5.63m = 5,630,000

Equity capital is assumed as - Total asset - current liability = 75-9 =66

Plains - 35 - (0.095*297) = 6.785m 6,785,000

Equity capital is assumed as - Total asset - current liability = 305-8 =297

Atlantic - 29.4 - (0.095*476) = -15.82m = -15,820,000

Equity capital is assumed as - Total asset - current liability = 488-12 =476

All Candian - 76.3 - (0.095*839) = -3.405m = 3,405,000