Question

In: Finance

ACF is a textile company that has operating earnings (EBIT) of $50 million. It employs $200...

ACF is a textile company that has operating earnings (EBIT) of $50 million. It employs $200 million capital that comes 60% from debt and the rest, 40% from equity. Its cost of debt is 5% and tax rate is 35%. Estimate the EVA if ACF’s beta is 1.5, the market risk premium is 6% and the risk free interest rate is 3%.

a) 19.0

b) 17

c) 15

d) 22

Expert Solution

Calculation of the EVA:

Formula:

EVA = Net operating profit after tax (NOPAT) - Invested capital x WACC

NOPAT = EBIT x (1-tax rate)

= ($50x (1-0.35)

= $50 x 0.65

= $32.50

*Interest = $200 x 60% x 5%

WACC = Cost of Debt after tax x 60% + **Cost of Equity x 40%

= 5%(1-0.35) x 60% + 12% x 40%

= 3.25% x 0.60 + 4.80%

= 1.95% + 4.80%

= 6.75%

**Cost of equity = 3% + 1.50 x 6%

= 3% + 9%

= 12%

EVA = $32.50 - $200 x 6.75%

= $.32.50 - 13.50

= $19 (Answer)

jeff jeffy answered 2 years ago

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