Question

Equity investors have contributed $250,000 to your start-up business, while creditors provided a loan of $300,000. You have calculated your firm's WACC at 10 percent. The annual interest payment is $25,000 and the marginal corporate tax rate is 21 percent. How much profit will your equityholders need to earn in order to break even in economic terms (i.e., EVA of zero)?

Question 10 options:

	$25,000
	$35,250
	$30,000
	$13,075

Answer 1

EVA=Net Profit to Equity shareholders+Interest*(1-tax rate)-Invested Capital*WACC
=>0=Net profit to equity shareholders+25000*(1-21%)-(250000+300000)*10%
=>Net profit to equity shareholders=55000-25000*(1-21%)=35250