In: Finance
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)
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