5e sol10-04 - Ex 10-4 Name: SOLUTION Enter the appropriate...

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Cost Management Hansen and Mowen Ex 10-4 Name: SOLUTION Enter the appropriate amounts in columns D and F. 1) Source of capital After-tax cost Bond rate + Premium Common stock 6% + 12% = 0.180 (1 -tax rate) x int. rate 10-year bonds 65% x 6% = 0.039 Enter the appropriate amounts in columns F, H, and K. Percent After-tax cost Weighted cost Common stock 50% x 0.180 = 0.0900 10-year bonds 50% x 0.039 = 0.0195 Total Weighted cost 0.1095 x Equity employed $2,000,000 Weighted average cost of capital $219,000 Calculation of EVA After-tax profit $210,000 Less: Weighted average cost of capital 219,000 EVA $(9,000) 2) Year 1 Percent After-tax cost Weighted cost Common stock 50% x 0.150 = 0.0750 10-year bonds 50% x 0.039 = 0.0195 Total Weighted cost 0.0945 x Equity employed $2,000,000 Weighted average cost of capital $189,000 Calculation of EVA After-tax profit $210,000 Less: Weighted average cost of capital 189,000 EVA $21,000 Year 2 Percent After-tax cost Weighted cost Common stock 50% x 0.120 = 0.0600
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5e sol10-04 - Ex 10-4 Name: SOLUTION Enter the appropriate...

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