Question

Compu-Jet Incorporated has EBIT of $525,000, EBT of $475,000, total assets of $1,660,000, and a capital structure which consists of 25% debt and 75% equity. The firm's after-tax cost of capital is 12.6% and its average tax rate is 40%. The firm has 65,000 shares of common stock outstanding and the current stock price per share is $28.50. What is the firm's Market Value Added (MVA)? (Note: you will not always use every piece of information given) a. $1,437,500 g bote e millons Avanoswlod noiteinca od b. $1,112,500 oldum song oota il teso10) os beau odno c. $894,500 she gapnimsolemooni ton as ou anonsu so d. $607,500 v olills Tablodsole olnobbe lo usamoon e. $436,500 Mondo lo es low as nolivib qolbesu boamos lhe osnom prinimisebolized l i ve

Answer 1

Given,

Total assets = $ 1660000

Weight of equity = 75%

Common stock shares = 65000

Current stock price = $ 28.50

Solution :-

Total assets = total liabilities and equity = $ 1660000

So,

Book value of equity = Total liabilities and equity x weight of equity

= $ 1660000 x 75% = $ 1245000

Market value of equity = Common stock shares x current stock price

= 65000 x $ 28.50 = $ 1852500

Now,

Firm's market value added (MVA) = Market value of equity - book value of equity

= $ 1852500 - $ 1245000 = $ 607500

Thus, Option 'd' is the correct answer.