Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financing were used by the company: $2 million of mortgage bondspaying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be relativelyrisky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays amarginal tax rate of 30 percent.Required:1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example, 4.36%would be entered as ".044".Mortgage bondsUnsecured bondsCommon stock2. Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your final answerto four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" percent.%Calculate the total dollar amount of capital employed for Ignacio, Inc.3. Calculate economic value added (EVA) for Ignacio, Inc., for last year. If the EVA is negative, enter your answer as a negative amount.Is the company creating or destroying wealth?4. What if Ignacio, Inc., had common stock which was less risky than other stocks and commanded a risk premium of 5 percent? How would that affect theweighted average cost of capital?What is the new EVA? In your calculations, round weighted average percentage cost of capital to four decimal places. If the EVA is negative,enter your answer as a negative amount.

Economic value added refers to the profit at its minimum level after covering all the expenses of…

Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financ by paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be risky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays amarginal tax rate of 30 percent. Required: 1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example would be entered as ".044". Mortgage bonds Unsecured bonds Common stock 2. Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your f to four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" %

Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financ by paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be risky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays amarginal tax rate of 30 percent. Required: 1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example would be entered as ".044". Mortgage bonds Unsecured bonds Common stock 2. Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your f to four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" %

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section2.A: Taxes

Problem 2P

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Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be relatively risky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays a marginal tax rate of 30 percent. (Round all ratios to four significant digits) 1. Calculate the after-tax cost of each method of financing. 2. Calculate the weighted average cost of capital for Ignacio, Inc. Calculate the total dollar amount of capital. Then Calculate economic value added (EVA for Ignacio, Inc. for last year. Is the company creating or destroying wealth? 3. What if Ignacio, Inc. had common stock which was less risky than other stocks and commanded a risk premium of 5 percent? How would that affect the weighted average cost of capital? How would it affect…
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