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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?
(C) One criticism of the EVA method is that it is subject to manipulation (see page 905 of Datar et al. (2019)). Why would managers be interested in manipulating the EVA and how could they do it?
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