Maddux Corporation has an EBIT of $955,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 16 percent and the corporate tax rate is 23 percent. The company also has a perpetual bond issue outstanding with a market value of $2.7 million. What is the value of the company

EBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income. EBIT is also sometimes referred to as operating income and is called this because it’s found by deducting all operating expenses (production and non-production costs) from sales revenue.

The calculation for EBIT is straightforward.

It is the company's EBIT x (1 - Tax rate).

A company's EBIT is calculated in the following way:

EBIT = revenues - operating expenses + non-operating income.

Now, in accordance with the statement :

Net income = EBIT(1 - tax)

Net income = $9,55,000 (1- 0.23)

Net income = $7,35,350

Value of unlevered company = Net income / cost of equity

Value of unlevered company = $7,35,350 / 0.16

Value of unlevered company = $4,595,937.5

Value of the company = $4,595,937.5+ 0.23(2,700,000)

Value of the company = $5,216,937.5 market value of firm

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