I need help with the question below. I get the question. My only question is that how come the tax rate was not accounted when calculating WACC? I thought it should be like this :
0.15*.50 = .075 cost of equity
0.05*.50 = .025*.60 = .015 (after tax cost of debt).
WACC = .09 or 9%?
Please help.
Zig Corp. provides the following information:
Pretax operating profit $300,000,000
Tax rate 40%
Capital used to generate profits 50% debt, 50% equity $1,200,000,000
Cost of equity 15%
Cost of debt 5%
What of the following represent Zig’s year-end economic value-added amount?
$0
$60,000,000
$120,000,000
$180,000,000
This answer is correct. The requirement is to calculate the year-end economic value-added (EVA) amount. EVA is equal to net operating profit after taxes minus the after-tax weighted-average cost of capital multiplied by invested capital. In this case, net operating profit after taxes is equal to $180,000,000 [$300,000,000 – (40% × $300,000,000)]. The weighted-average cost of capital is equal to 10% [(15% + 5%) ÷ 2]. EVA is equal to $180,000,000 – (10% × $1,200,000,000) = $60,000,000.
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