Question

Gunnar Corp. Uses no debt. The weighted average cost of capital is 8.3 percent. The current market value of the equity is $43 million and the corporate tax rate is 25 percent. What is the EBIT? Note: Use the formua: VU = EBIT(1 – T)/RU and solve for EBIT. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.G., 1,234,567.89.)

Answer 1

VU = EBIT(1 - T)/RU

therefore, EBIT(1 - T)/RU = VU

EBIT = (VU x RU)/(1 - T)

EBIT = ($43,000,000 x 0.083) / (1 - 0.25)

EBIT = $3,569,000 / 0.75 = $4,756,666.67

Explanation:

VU = EBIT(1 - T)/RU

therefore, EBIT(1 - T)/RU = VU

EBIT = (VU x RU)/(1 - T)

EBIT = Earnings Before Interest & Tax. It is the net income before interest and tax expenses are deducted. It is obtained by deducting all other expenses from the gross profit. It is an important metric that shows management's ability to control expenses relating to core operations without adding the financing and tax expenses.

VU = Unleveraged Value. It represents the value of the company without the encumbrances and costs brought by debts.

T = Tax rate

RU = Unleveraged Risk or debt-free WACC, i.e debt-free weighted cost of capital.

WACC = WACC is the company's cost of capital. It is the rate that the company is expected to pay to holders of all its securities, i.e. equity and debt holders. It is obtained by multiplying the cost of each capital source by its relevant weight. The products are then added together to get WACC.