has just opened usines being nvesto me that your upplied capital equal to $20,000,000: debt is 25 percent of capital and equity is 75 perce of capital. Also assume that creditors require a before-tax rate of return of 8.333 percent, vhile stockholders require a 15 percent return. The tax rate is 40 percent. Now assume hat for this first year the firm expects its operations to produce sales of $32,000,000 and EBIT of $4,600,000. Finally assume that the firm expects this EVA to be the same in every uture year (a perpetuity). If the WACC is the correct discount rate to use, determine the

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Assume that your firm has just opened for business. The firm is being funded with investor-
supplied capital equal to $20,000,000: debt is 25 percent of capital and equity is 75 percent
of capital. Also assume that creditors require a before-tax rate of return of 8.333 percent,
while stockholders require a 15 percent return. The tax rate is 40 percent. Now assume
that for this first year the firm expects its operations to produce sales of $32,000,000 and
EBIT of $4,600,000. Finally assume that the firm expects this EVA to be the same in every
future year (a perpetuity). If the WACC is the correct discount rate to use, determine the
market value added by the operations of this firm.
Enter your answer in whole dollars, truncated to the dollar, with no punctuation. For
example, if your answer is $1,112,456.55, enter "1112456". Canvas may insert commas.
Transcribed Image Text:Assume that your firm has just opened for business. The firm is being funded with investor- supplied capital equal to $20,000,000: debt is 25 percent of capital and equity is 75 percent of capital. Also assume that creditors require a before-tax rate of return of 8.333 percent, while stockholders require a 15 percent return. The tax rate is 40 percent. Now assume that for this first year the firm expects its operations to produce sales of $32,000,000 and EBIT of $4,600,000. Finally assume that the firm expects this EVA to be the same in every future year (a perpetuity). If the WACC is the correct discount rate to use, determine the market value added by the operations of this firm. Enter your answer in whole dollars, truncated to the dollar, with no punctuation. For example, if your answer is $1,112,456.55, enter "1112456". Canvas may insert commas.
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