Question

Once Bitten Corp. uses no debt. The weighted average cost of capital is 5 percent. The current market value of the equity is $16 million and the corporate tax rate is 35 percent. What is EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.) EBIT $

Answer 1

Solution:

If there are corporate taxes, the value of an unlevered firm is:

V_u = EBIT(1 - T) / R_u

Using this relationship, we can find EBIT as :

$16,000,000 = EBIT(1 - 0.35) / 0.05

EBIT(0.65) = $800,000

EBIT = $800,000 / 0.65

EBIT = $1,230,769.23

Therefore EBIT = $1,230,769.23