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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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  1. 17 December, 09:37
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    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
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Home » Business » 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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