Schipper Company had after-tax operating income last year of $115,000. Two sources of financing were used by the company: $1.3 million of mortgage bonds paying 8 percent interest and $700,000 in common stock, which was considered to be no more or less risky than other stocks. The rate of return on long-term government bonds is 6 percent. Schipper Company pays a marginal tax rate of 30 percent. Total capital employed is $1.5 million.
Required
1. What is the after-tax cost of the mortgage bonds?
2. What is the after-tax cost of the common stock?
3. What is the weighted average cost of capital for Schipper?
4. What is the dollar cost of capital for Schipper?
5. Calculate EVA for Schipper. Is Schipper creating wealth or not?