Cost of capital constructo construction company

Assignment Help Financial Accounting

Reference no: EM133432587

Question: The Constructo Construction Company is a real estate developer and building contractor. The company has two sources of long-term capital, debt and equity. The cost of issuing debt is the after-tax cost of the interest that relates to the debt. (Interest paid on debt is tax deductible). The cost of the company's equity capital is the investment opportunity rate of Constructo investors. This is the rate that investors could earn on investments that are of similar risk to Constructo Construction. The interest rate on the company's $ 90 million of long-term debt is 10 percent per annum, and the company's tax is 40 percent. The market value of the long-term debt is the same as the carrying amount of the debt. The cost of the company's equity

capital is 15 percent, and the market value (and book value) of the company's equity is $ 135 million.
The following data relate to the two divisions of the Constructo Construction Company for the past year.
Total assets Current liabilities Operating profit before tax
Real estate Division $150,000,000 $9,000,000 $30,000,000
Construction Division $90,000,000 $6,000,000 $27,000,000

Required :

a) Calculate the weighted average cost of capital Constructo Construction Company.

b) Use and explain the weighted average cost of capital to calculate the EVA for each of the two divisions.

c) Explain the different results between the weighted average cost of capital and the EVA for each of the two divisions.

d) Describe three (3) benefits of Weighted Average Cost of Capital (WACC) in Constructo Construction Company.

Reference no: EM133432587

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