Question

6) ア/) dhe

Answer 1

Following Information provided -

Equity = 130,000,000

Debt(Liabilities) = 90,000,000

Total Capital Invested (E+D) = 210,000,000

Profit before tax = 48,200,000

Cost of equity = 25%

Pre-tax Cost of Debt = 19%

Tax rate = 34%

Firstly, we will calculate the WACC of company

$WACC = cost of equity*weight of equity + Post tax cost of debt*weight of debt$

Post-tax cost of debt = 16%(1-0.34) = 10.56 %

weight of equity in capital = 130,000,000/210,000,000 = 0.619

weight of debt in capital = (1 - 0.619) = 0.381

WACC = 25%*0.619 + 10.56%*0.381

= 15.475 + 4.02336

= 19.49836 %

In order to calculate MVA and market value of company , we need to calculate EVA first.

$EVA = Profit after tax - [WACC*capital invested]$

EVA = 48,200,000*0.66 -(0.1949836*210,000,000)

= 31,812,000 - 40,946,556

= - 9,134,556

Thus, company has negative EVA of (9,134,556)

a) Market value Added (MVA)

MVA is equal to present value of all EVA series.

MVA =PV(EVA)

MVA = -9,134,556/0.1949836

= - 46,847,816.94

Thus, company has negative MVA of (46,847,816.94)

b) Market Value of Firm

Market value of Firm = Invested capital + MVA

= 210,000,000 - 46,847,816.94

= 163,152,183.06

Thus, company's market value is 163,152,183.06