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Consider this case: Last year, Jackson Tires reported net sales of $80 million and total operating...

Consider this case: Last year, Jackson Tires reported net sales of $80 million and total operating costs (including depreciation) of $52 million. Jackson Tires has $115 million of investor-supplied capital, which has an after-tax cost of 7.5%. If Jackson Tire's tax rate is 40%, how much value did it's management create or lose for the firm during the year?

A) 39.38 million

B) 2.66 million

C) 60.38 million

D) 8.18 million

According to Jackson Tire's balance sheet, the firm has $120 million of total common equity (common shares plus retained earnings). The firm has $10 million shares of common shares outstanding, and the current shares price is $25.00. What is Jackson Tires current MVA?

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Answer #1

Solution

1. Option D is correct=8.18 million

Explanation :

EBIT=80-52

=$28 million

EVA=net operating profit after tax-(capital invested×WACC)

=$28 m (1-0.4)-($115 m ×.075)

=$8.18 million

2. MVA=(number of outstanding common share×market price per share )- capital invested

=(10×25)-120

=$130 million

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