Question

Once Bitten Corp. uses no debt. The weighted average cost of capital is 7.6 percent. The current market value of the equity is $14 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.)

Answer 1

Here the Weighted Average Cost of Capital (WACC) = 7.6%

WACC= (Ke X We) + (Kdt X Wd)

here, Ke= Cost of equity,

We= Weight of equity

Kdt= Cost of debt after tax

Wd= Weight of debt

Here, Bitten Corp does not use debt,

therefore we will consider only equity in our calculation

WACC= (Ke X We) + (Kdt X Wd)

0.076= (Ke X 1)+ 0

Since, This company uses 100% equity weight assigned to equity is 1

Cost of capital which is WACC is equal to cost of equity in this case

Value of firm is equal to value of equity on account of absence of debt

Value of Firm/ Equity = EBIT/ WACC

14,000,000= EBIT/ 0.076

EBIT= 14,000,000 X 0.076

EBIT = $ 1,064,000 or EBIT= $ 1.06 million