Problem: Maple Leaf Industries, headquartered in Toronto, is a multiproduct company with three divisions: Pacific Division, Plains Division, and Atlantic Division. The company has two sources of long-term capital: debt and equity. The interest rate on Maple Leaf's $400 million debt is 9 percent, and the company's tax rate is 30 percent. The cost of Maple Leaf's equity capital is 12 percent. Moreover, the market value of the company's equity is $600 million. (The book value of Maple Leaf's equity is $430 million, but that amount does not reflect the current value of the company's assets or the value of intangible assets.)
The following data (in millions) pertains to Maple Leaf's three divisions.
Division
Before-Tax
Operating Income
Current
Liabilities
Total
Assets
Pacific .................................................. $14 $6 $ 70
Plains .................................................. 45 5 300
Atlantic ............................................... 48 9 480
Required:
1. Compute Maple Leaf's weighted-average cost of capital (WACC).
2. Compute the economic value added (or EVA) for each of the company's three divisions.
3. What conclusions can you draw from the EVA analysis?