Question

A company has operating assets of $541 million and operating liabilities of $94 million and an expected EBIT of $78 million. What is the company's expected residual operating income (to one decimal place) if its WACC is 9.9% and the corporate tax rate is 30%?

Answer 1

1. We know that Operating Assets - Operating Liabilities = Capital Employed

i.e. 541-94 = $ 447 million

2. interest Cost = Capital Employes * WACC

i.e. 447* 9.9%= $ 4.3 million

3. Expected Earning Before Interest & Taxes - Interest Cost = Expected Earning Before Tax

i.e 78-4.3 = $ 73.7 million

4. Expected Residual Operating Income = Expected Earning Before Tax - Tax

i.e. 73.7 - (73.7*30%)= $ 51.6 Million

ANSWERS:- SO, THE EXPECTED RESIDUAL OPERATING INCOME IS $ 51.6 MILLION.