Last year, Jackson Tires reported net sales of $40 million and total operating costs (including depreciation) of $26 million. It had $75 million of investor-supplied capital, with an after-tax cost of 12.5%. If the company’s tax rate is 25%, how much value did its management create or lose for Jackson Tire during the year?

$1.125 million

Explanation:

Calculation for how much value did its management create or lose for Jackson Tire during the year

First step is to calculate the EBIT

Using this formula

EBIT = Net Sales - Total Operating Costs

Let plug in the formula

EBIT=$40 million - $26million

EBIT=$14 million

Now let calculate how much value did its management create or lose

Using this formula

Value =EBIT x (1 - Tax) - (Total Net Operating Capital x WACC)

Let plug in the formula

Value=[$14 million x (1 - 0.25)] - [$75 million x 0.125]

Value=[$14 million x 0.75)] - [$75 million x 0.125]

Value=$10.5million -$9.375 million

Value=$1.125 million

Therefore how much value did its management create or lose for Jackson Tire during the year is $1.125 million

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