OSA Company has the following values of interest-bearing debt and common equity capital: Financing Source Dollar Amount Interest Rate Cost of Capital Short-term loan $200,000 12% Long-term loan $200,000 14% Equity capital $600,000 22%
OSA Company has the following values of interest-bearing debt and common equity capital: Financing Source Dollar Amount Interest Rate Cost of Capital Short-term loan $200,000 12% Long-term loan $200,000 14% Equity capital $600,000 22%
Chapter7: Types And Costs Of Financial Capital
Section: Chapter Questions
Problem 11EP
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OSA Company has the following values of interest-bearing debt and common equity capital:
Financing Source Dollar Amount Interest Rate Cost of Capital
Short-term loan $200,000 12%
Long-term loan $200,000 14%
Equity capital $600,000 22%
OSI is in the 30 percent average tax bracket.
A. Calculate the after-tax weighted average cost of capital for OSI.
B. Given that OSI's EBIT is $300,000, compute its EVA.
C. Did the venture build or destroy value? Explain.
Make sure to show all the formulas and calculations in addition to any assumption needed.
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