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The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Expected EBIT $600,000
Growth rate in EBIT, gL 0 %
Cost of equity, rs 10 %
Shares outstanding, no 100,000
Tax rate, T (federal-plus-state) 25 %

What is Rivoli's intrinsic value of operations (i.e., its unlevered value)?

Respuesta :

Answer:

Intrinsic value is $45

Explanation:

The starting point to determining Rivoli Company intrinsic value is to compute the earning after tax as shown below:

Earnings after tax=earning before tax*(1-tax rate)

earnings before tax is $600,000

tax rate

earnings after tax=$600,000*(1-0.25)

                               =$600,000*0.75

                               =$450,000

Then we need to compute earnings per share;

Earnings per shares=earnings after tax/weighted average number of shares

                                 =$450,000/100,000

                                =$4.5

Intrinsic value=earnings per share/cost of equity

  cost of equity is 10%

intrinsic value=$4.5/10%

                      =$45

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