SLG Corp. is an all-equity firm with a weighted average cost of capital of 10.02 percent. The current market value of the equity is $13.4 million and the total tax rate is 22 percent. What is EBIT?
A) $1,966,667
B) $2,021,194
C) $1,721,385
D) $2,095,385
E) $1,943,182

Question

Quizplus · Accepted Answer

Given, 
Weighted average cost of capital (WACC) = 10.02%
Market value of equity = $13.4 million
Total tax rate = 22%

We can use the formula for WACC as follows:
WACC = Cost of Equity x Weight of Equity
Cost of Equity = WACC / Weight of Equity
Cost of Equity = 10.02% / 1 = 10.02%

We can use the formula for calculating EBIT as follows:
EBIT = (Net Income + Interest Expense + Taxes) / (1 - Tax Rate)

Since the company is an all-equity firm, the interest expense will be zero.

We can rearrange the EBIT formula as follows:
EBIT = Net Income / (1 - Tax Rate) + Taxes / (1 - Tax Rate)

Since the company is an all-equity firm, the net income will be equal to earnings before taxes (EBT).

Substituting the values, we get:
EBIT = EBT / (1 - Tax Rate) + Taxes / (1 - Tax Rate)
EBIT = EBT + Taxes
EBIT = Net Income / (1 - Tax Rate) + Taxes / (1 - Tax Rate)
EBIT = $1,721,385 + 0.22 x $1,721,385
EBIT = $2,095,385

Therefore, the best choice is C, which is $1,721,385.

SLG Corp Is an All-Equity Firm with a Weighted Average Cost