Ignacio, Inc., had after-tax operating income last year of $1,197,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 percent interest, and $10 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 3 percent. Ignacio, Inc., pays a marginal 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".
Ignacio, Inc., had after-tax operating income last year of $1,197,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 percent interest, and $10 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 3 percent. Ignacio, Inc., pays a marginal 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".
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 5P
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Question
![Calculating Weighted Average Cost of Capital and Economic Value Added (EVA)
Ignacio, Inc., had after-tax operating income last year of $1,197,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6
percent interest, and $10 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 3 percent. Ignacio, Inc., pays a marginal 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".](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd08147b4-062e-42d4-b5f0-c0c53f447d52%2Ff7d6f6a5-3e21-45ca-8c08-f9463086599b%2Fin51c2r_processed.png&w=3840&q=75)
Transcribed Image Text:Calculating Weighted Average Cost of Capital and Economic Value Added (EVA)
Ignacio, Inc., had after-tax operating income last year of $1,197,000. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6
percent interest, and $10 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 3 percent. Ignacio, Inc., pays a marginal 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".
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