Question

Nina Corp. uses no debt. The weighted average cost of capital is 6 percent. The current market value of the equity is $16 million and the corporate tax rate is 35 percent.
What is EBIT? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your answer to 2 decimal places. (e.g., 32.16))
EBIT $

Answer 1

Answer:

$1,476,923.08  

Explanation:

The company is an all-equity firm, hence, the value of the firm can be determined using the formula below:

value of firm=EBIT*(1-tax rate)/average cost of capital

Value of firm=$16,000,000

EBIT is the unknown

tax rate=35%

average cost of capital=6%

16,000,000=EBIT*(1-35%)/6%

16,000,000=EBIT*0.65/6%

16,000,000*6%=EBIT*0.65

EBIT=16,000,000*6%/0.65

EBIT=$1,476,923.08