Thrice Corp. uses no debt. The weighted average cost of capital is" 8.9" percent. The current market value of the equity is $17.5 million and the corporate tax rate is 25 percent. What is EBIT?

Question

Business

Yusuf Sutton

17 December, 06:48

Thrice Corp. uses no debt. The weighted average cost of capital is" 8.9" percent. The current market value of the equity is $17.5 million and the corporate tax rate is 25 percent. What is EBIT?

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Franco Galloway · Answer 1

EBIT = $2.076 million

Explanation:

The market value can be ascertained by discounting the earnings after tax by the weighted average cost of capital (WACC).

So we put dis in an equation;

Market Value = Earnings after tax / WACC

Earnings after tax = (1-tax rate) * EBIT

Note EBIT means earning before interest and tax. And we don't have this figure. So we denote it with letter " y "

Earnings after tax = (1-0.25) * y

= 0.75y

Substitute this into the market value equation, then we have;

Market Value = Earnings after tax / WACC

17.5 = 0.75y/0.089

0.75y = 17.5 * 0.089

y = (17.5 * 0.089) / 0.75

y = $2.076 million

EBIT = $2.076 million