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Question - Melfort Company has two sources of funding: long-term debt with a market and book value of $13,500,000 issued at an interest rate of 12%; and equity capital that has a market value of $9,000,000 (book value of $3,000,000). The cost of equity capital is 5% and the company's tax rate is 25%.
Melfort Company has three divisions located in three separate Canadian cities. Each division operates as a profit centre. Pertinent information for each centre is as follows:
Location
Total Operating Income
Total Assets
Current Liabilities
Kelowna
$720,000
$3,000,000
$150,000
Fredericton
$900,000
$6,000,000
$450,000
Hudson
$1,530,000
$9,000,000
Required -
(A) What is the company's weighted-average cost of capital?
(B) What is the EVA for each profit centre?
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