Question

In: Finance

Sabre Technology recently reported the following information:

Sabre Technology recently reported the following information:

Net income = $900,000.
Tax rate = 40%.
Interest expense = $200,000.
Total investor-supplied operating capital employed = $7.5 million.
After-tax cost of capital = 8%.

What is the company’s EVA? Hint: Work backwards from net income to find EBT first and then EBIT.

Solutions

Expert Solution

economic value added can be calculated by

EBIT(1-tax) -(capital employed*after tax cost of capital)

given net income = 900000

tax rate is 40%

so EBT = netincome /(1-t) = 900000/(1-0.4) = 1500000

interst expense is 200000

EBIT = EBT+interest

= 1500000 + 200000 = 1700000

enterprice value = 1700000*(1-0.4) -7500000*8%(by formula mentioned above)

= 420000


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