1.       What is ABC’s after-tax debt payment?

2.       What is ABC’s after-tax debt plus net income?

3.       What is ABC’s weighted average cost of capital?

4.       What is ABC’s economic value added (EVA)?

 

 

Can I double check my answer with those who had completed this module?

Many thanks.

1. $ 325 million

2. $ 860 million

3. 8.6 %

4. $ 774 million

 

 

1. Agreed.
2. 500 + 325 + 75 - 40 = 860. But why did you include the 500? Also, why are we to add the after-tax debt payment to the net income? Does the firm treat the 325 as if it were income? I'm pretty unsure of this, obviously.
3. Agreed.
4. This one depends on #2. I agree that it would be 774 if #2 is 860.

Equity is 500 which is part of the asset. So I add in the equity amount.

In the question, it is stated that after-tax debt payment plus net income, thus I add in the after-tax debt payment.

1. Your debt payment is $40MM, not $500MM
2. $500MM Assets will not appear as Income

1) .08*.65*500=26

 

2) 75+26=101

3)8.6%

4)101-.086*1000=15

For #2, we need to use net income.  I think that's (75-40)*.65, since we're told that earnings are 75, not net income.  Does anyone agree?

I would agree except NEAS said in this thread http://www.neas-seminars.com/discussions/shwmessage.aspx?ForumID=167&MessageID=10577

that accounting income is net of taxes. 

[NEAS: Net income means net of taxes]

Forgive me but what is the debt payment?

I had assumed this would be the amount you pay to debtors, i.e. interest. This is given as $40M, though, so it seems strange to me that we would be asked to provide it.