PLASI Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. If the firm borrows $2,000, its YTM will be 6.5% and its coupon rate will be 8%. If the company's marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings?
Solution:
Information provided in the question are
EBIT $500 ; Borrowing $2000
| Calcualtion of After Tax Earning of PLASI Corporation | |
| EBIT | $ 500.00 |
| Net Interest Expense (6.5%) | $ 130.00 |
| EBT | $ 370.00 |
| Tax (20%) | $ 74.00 |
| After Tax Earning | $ 296.00 |
After Tax Earning is $296
Notes:
1) In this question 2 types of interest rates and 2 types of tax rates are given, but it is given that EBIT of PLASI Corporation is expected to remain constant perpetual.
2)So, instead of coupon rate of 8% , we have taken YTM of 6.5%.
3) In the same way, instead of marginal tax of 30%. we have taken average tax of 20%.
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