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Calculate Economic Value Added With Debt Cost And EBIT Rates Given

Question

Westbrook Inc. is financed with debt that costs it 5% (pre-tax) or $12.5m annually and expects to generate an EBIT of $50m per year perpetually. The company is at its target debt/equity ratio of 1.  Depreciation is expected to remain at $2.5m annually and taxes at the rate of 40% (for the foreseeable future).  It pays out all its net income as dividends. The risk-free rate (RF) is 3% and the market risk premium (MRP) is 7%. Westbrook’s beta is 1.0. What is Westbrook’s anticipated annual Economic Value Added (EVA)?

Summary

The question belongs to Finance and it discusses about calculation of economic value added with a debt cost of 5% (pre-tax) to earn EBIT of $50m per year. Detailed calculations have been given in the solution.

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