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Homework answers / question archive / A firm has a positive economic value added (EVA) of $500 (all amounts in thousands), long-term debt of $20,000, equity of $40,000, a weighted average cost of capital (WACC) of 9% and a marginal tax rate of 32%
A firm has a positive economic value added (EVA) of $500 (all amounts in thousands), long-term debt of $20,000, equity of $40,000, a weighted average cost of capital (WACC) of 9% and a marginal tax rate of 32%. What is this organization's earnings before interest and taxes (EBIT)?
Given,
Economic value added(EVA) = $500
Long term debt = $20,000
Equity = $40,000
WACC = 9%
Marginal tax rate = 32%
Capital employed = Long term debt + Equity
= 20,000 + 40,000
= $60,000
Economic value added = Operating profit after tax - Cost of capital
500 = Operating profit after tax - 60,000 x 9%
500 = Operating profit after tax - 5,400
Operating profit after tax = $5,900
EBIT = Operating profit after tax/(1 - Tax rate)
= 5,900/(1- 0.32)
= 5,900/0.68
= $8,676
