# Confused w/ One Problem

V3 - Corp Finance…Reading 30 Q17 EBIT = 400,000 all equity WACC = 10% tax rate = 30% Garth Co. will issue \$1m in debt and buyback equivalent amount of equity. What is the cost of equity after the issuance? (The end-of-chapter solution calculates the unlevered value of the company using EBIT without adjusting for taxes…WHY???..Also, example on pgs.106-107 is identical to this problem yet unlevered value is calculated using earnings after taxes.) Please help…Thanks!

You’re lucky, you’re confused with one problem only… others are confused with many more than that Sorry, I have no help with this one, but good luck.

bro i thought i had mastered corp till u showed up After lookin at this i think ebit(1-t) is clearly a better proxy for cash which is what realy matters I think cfai made a mistake. I found many such mistakes before and i emailed about them. A nice lady named wanda handles such emails. But so far she never admits a mistake and answers with. Its an aproximation. Or its a convention. I say take it to cfai and update us.

Hi, check the CFAI errata. This was incorrect in the book - the one who made up the problem hadn’t accounted for taxes… The right answer (after taking into account taxes) is C.

Could someone demonstrate how you get 1.33 = (r_0-r_D)(1-.30)D/E? The #s I’m using are giving me 1.55% which is wrong.