Question

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?

Answer 1

Answer:

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