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American Water Company, Inc WACC NOPAT EVA

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6. THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 6 THROUGH 8. American Water Company, Inc. has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 10%, and equity capital that has a market value of $10 million (book value of $8 million). American Water Company has subsidiaries in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity is 24%, while the combined income tax rate is 40%.
Operating Income Assets Current Liabilities
Virginia $1,960,000 $8,000,000 $500,000
North Carolina $2,200,000 $16,000,000 $600,000
South Carolina $3,040,000 $24,000,000 $800,000

What is the EVA for Virginia?

a $52,740
b $27,460
c $92,540
d $51,000

7. What is the NOPAT for North Carolina?

a $1,350,580
b $1,220,000
c $1,320,000
d $1,305,000

8. What is the weighted average cost of capital (WACC) for South Carolina?

a 15.00%
b 24.00%
c 12.00%
d 18.00%

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Solution Summary

Your tutorial with instructional comments and formulas needed is attached in Excel. Click in cells to see computations. It is a little "tricky" to ask for WACC of subsidiary when they don't have their own debt and equity issues. This is clarified.

Solution provided by:
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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