Question

Last year, Jackson Tires reported net sales of $80 million and total operating costs (including depreciation) of $52 million. It had $115 million of investor-supplied capital, with an after-tax cost of 7.5%. If the company’s tax rate is 40%, how much value did its management create or lose for Jackson Tire during the year?

Answer 1

Value created for the firm = $8.18 million

Step-by-step explanation:

given data

net sales = $80 million

total operating costs = $52 million

Investor-supplied capital = $115 million

after-tax cost = 7.5%

company’s tax rate = 40%

solution

we get here Earning Before Interest and tax that is express as

Earning Before Interest and tax = Net Sales - Operating costs .........1

put here value and we get

Earning Before Interest and tax = $80 million - $52 million

Earning Before Interest and tax = $28 million

and

Net Operating profit after tax = $28 × ( 1 - 40% ) .........2

Net Operating profit after tax = $16.8 million

and

Return on investor-supplied capital will be

Return on investor-supplied = $115 million × 7.5%

Return on investor-supplied = $8.625 million

so here Value created for the firm will be

Value created for the firm = Net operating profit after tax - Return on investor-supplied capital ..................3

Value created for the firm = $16.8 - $8.625 = $8.175 million

Value created for the firm = $8.18 million