Question

Once Bitten Corp. uses no debt (it is "unleveraged"). The weighted average cost of capital is 10 percent. If the current market value of the equity is $14 million and there are no taxes, what is EBIT? Note: Use the "M&M proposition I formula with taxes" and enter a 0 for the tax rate and a $0 for debt. Then solve for the EBIT. Use the WACC here as a measure of the unleveraged cost of capital R_U. (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g. 1,500,000, not 1.5)

  

EBIT

$

s [LO2]

Once Bitten Corp. uses no debt. The unleveraged cost of capital is 6.2 percent. The current market value of the equity is $16 million and the corporate tax rate is 35 percent.

  

What is EBIT? Note: Use the M&M proposition I formula with taxes but without any debt and solve for the EBIT. (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,550,000, not 1.55. Round your answer to 2 decimal places, e.g., 1.55.)

  

EBIT

$

Answer 1

Given,

WACC = 10% or 0.10

Current market value of equity = $14 million or $14000000

Solution :-

EBIT = current market value of equity x WACC

= $14000000 x 0.10 = $1400000

  

LO2

Given,

Unlevered cost of capital = 6.2% or 0.062

Current market value of equity = $16 million or $16000000

Tax rate = 35% or 0.35

Solution :-

EBIT = Current market value of equity x [unlevered cost of capital/(1 - tax rate)]

= $16000000 x [0.062/(1 - 0.35)]

= $16000000 x 0.062/0.65 = $1526153.85