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Financial Impact of Doubling EBIT | PDF | Net Income | Depreciation
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Financial Impact of Doubling EBIT

Edge Brothers reported net income of $385,000 with a tax rate of 40% and interest expense of $200,000. If its operating income (EBIT) doubled to $1,683,334 while tax rate and interest expense remained the same, its net income would be $890,000. Coolidge Cola forecasts EBITDA of $10,000,000 with depreciation of $5,000,000 and other expenses resulting in net income of $1,800,000. If depreciation increased to $8,000,000 while other factors remained unchanged, its net cash flow would be $8,000,000.

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273 views2 pages

Financial Impact of Doubling EBIT

Edge Brothers reported net income of $385,000 with a tax rate of 40% and interest expense of $200,000. If its operating income (EBIT) doubled to $1,683,334 while tax rate and interest expense remained the same, its net income would be $890,000. Coolidge Cola forecasts EBITDA of $10,000,000 with depreciation of $5,000,000 and other expenses resulting in net income of $1,800,000. If depreciation increased to $8,000,000 while other factors remained unchanged, its net cash flow would be $8,000,000.

Uploaded by

Casper John Nanas Muñoz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Net income Answer: b Diff: M

i
. Edge Brothers recently reported net income of $385,000. The tax
rate is 40 percent. The company’s interest expense was $200,000.
What would have been the company’s net income if it would have been
able to double its operating income (EBIT), assuming that the
company’s tax rate and interest expense remain unchanged?

a. $ 770,000
b. $ 890,000
c. $ 920,000
d. $1,100,000
e. $1,275,000

Net cash flow Answer: d Diff: M


ii
. Coolidge Cola is forecasting the following income statement:

Sales $30,000,000
Operating costs excluding depreciation and amortization 20,000,000
EBITDA $10,000,000
Depreciation and amortization 5,000,000
Operating income (EBIT) $ 5,000,000
Interest expense 2,000,000
Taxable income (EBT) $ 3,000,000
Taxes (40%) 1,200,000
Net income $ 1,800,000

Assume that, with the exception of depreciation, all other non-cash


revenues and expenses sum to zero.

Congress is considering a proposal that will allow companies to


depreciate their equipment at a faster rate. If this provision
were put in place, Coolidge’s depreciation expense would be
$8,000,000 (instead of $5,000,000). This proposal would have no
effect on the economic value of the company’s equipment, nor would
it affect the company’s tax rate, which would remain at 40 percent.
If this proposal were to be implemented, what would be the
company’s net cash flow?

a. $2,000,000
b. $4,000,000
c. $6,800,000
d. $8,000,000
e. $9,800,000
i
. Net income Answer: b Diff: M

We need to work backwards through the income statement to get the EBIT.
EBIT $841,667 ($641,667 + $200,000)
Interest 200,000
EBT $641,667 ($385,000/0.6)
Tax (40%) 256,667
NI $385,000

If EBIT doubles:
EBIT $1,683,334 ($841,667 × 2)
Interest 200,000
EBT $1,483,334
Tax (40%) 593,334
NI $ 890,000 ($1,483,334 × 0.6)

ii. Net cash flow Answer: d Diff: M

The income statement would show:


Sales $30,000,000
Oper. costs (excl. depr. and amort.) 20,000,000
EBITDA $10,000,000
Depreciation and amortization 8,000,000
EBIT $ 2,000,000
Interest exp. 2,000,000
EBT $ 0
Taxes 0
NI $ 0

NCF = NI + DEP and AMORT


NCF = 0 + $8,000,000 = $8,000,000.

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