Jackson Tires reported net sales of $80 million and total operating costs (including depreciation) of $52 million. Jackson Tires has $115 million of investor-supplied capital, which has an after-tax cost of 7.5%. If Jackson Tire's tax rate is 40%, how much value did it's management create or lose for the firm during the year?

a. 39.38 million

b. 2.66 million

c. 60.38 million

d. 8.18 million

According to Jackson Tires balance sheet, the firm has $120 million of total common equity (common stock plus retained earnings). The firm has 20 million shares of common stock outstanding, and the current stock price is $25.00 What is Jackson Tire's current MVA?

d. 8.18 million

MVA is $380 million

Explanation:

Net residual Income is the value of the firm. All the preferred and required / agreed return on any the funding availed is deducted from the net earning after profit to make the value for the firm. The income purely associated to the firm is considered as the value of the firm.

Earning Before Interest and tax = Net Sales - Operating costs = $80 million - $52 million = $28 million

Net Operating profit after tax = $28 x (1 - 40%) = $16.8 million

Return on investor-supplied capital = $115 million x 7.5% = $8.625 million

Value created for the firm = Net operating profit after tax - Return on investor-supplied capital = $16.8 - $8.625 = $8.175 million = $8.18 million

MVA is the net of market capitalization and stockholders equity of the firm. It is the difference of market value and book value of equity of a firm.

MVA = (Outstanding shares x Market value of shares) - Book value od the equity = (20 million shares x $25 per share) - $120 million = $500 million - $120 million = $380 million