sugar Skull Corporation uses no debt. The weighted average cost of capital is 8.5 percent. The current market value of the equit
1 answer:
The value of EBIT in the given question is $399,647,060.
Given, that the weighted average cost of capital = 8.5 percent
Corporate tax rate = 21 percent
The current market value of the equity = $43 million
Using the formula for determining the value of the unlevered firm which is,
Value of unlevered firm = {EBIT(1-t)}/ (equation 1)
( where, t = corporate tax rate
= weighted average cost of capital )
Now, Substituting the value of corporate tax rate, the value of unlevered firm, and the weighted average cost of capital in equation 1.
$43 million = EBIT {(1-0.21)/0.085} (Since, corporate tax rate and weighted average cost of capital are in percentage to convert them into values we divide them by 100 )
43,000,000 = EBIT * 0.79/0.085
EBIT = 43,000,000 * 0.085/0.79
= 43,000,000 * 9.29411
= 39,96,47,058.8235
= $399,647,060 ( after rounding off to the nearest tens)
Hence, the value of EBIT in the given question is $399,647,060
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