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In: Finance

Please answer the problem below Subu Motors has total capital of $200 million, consisting of 40%...

Please answer the problem below

Subu Motors has total capital of $200 million, consisting of 40% debt (costing 5% before taxes) and 60% equity (costing 9%). Subu’s EBIT is $30 million and the tax rate is 30%. Estimate Subu’s EVA (Economic Value Added). (Enter your answer to the nearest $0.1 million. Leave the $ sign off. In other words, if your answer is $55.55 million, enter 55.6 for your answer. If your answer is negative, be sure to include a minus sign, like -55.6)

Solutions

Expert Solution

Computation of Economic Value Added:

Net operating Profit after tax (W. Note 1)                  (X)

15.4

Less: Cost of Capital employed (W. Note2)                (Y)

(13.6)

Economic Value Added                                              (X-Y)

1.8

Working Note 1:

Net Operating Profit after Tax:

Earnings before Interest and Tax =             $ 30 millions

Less: Interest on debt ($200*40%*5%) =             ($ 4 millions)

                                                                      $ 26 millions

Less: Tax ($26 millions*30%) =             ($7.8 millions)

                                                                      $18.2 millions

Add: Interest net of tax (4 – 4*30%) =             $ 2.8 millions

Net Operating Profit after Tax =             $15.4 millions

Working Note 2:

Total Capital employed                  (A) =             $ 200 millions

Equity to capital employed =             0.60

Debt to capital employed =             0.40

Debt cost after tax =             5% - (5%*30%)

                                                                      =             3.5%

Equity cost                                                        =             9%

Weighted Average Cost of Capital (B) =             (0.60*9%) + (0.40*3.5%)

                                                                      =             6.8%

Cost of Capital Employed             (A*B) =             200millions*6.8%

                                                                       =             13.6 millions


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