EBIT

CFA Level I FRA
#1

Hi guys, can you please help clarify IE in this formula?

EBIT = EBT + IE

My question is, for IE do you take the IE from the long term loan/debt or a combination of long term and short term loan?

Thanks

#2

All interest expense: long-term debt, short-term debt, capital leases . . . the works.

(Remember that for bonds issued at a premium or discount, interest expense is not the same as coupons paid.)

#3

Thank-you S2000magician for your prompt reply.

So let’s say:

Bank overdrafts and other loans = $8,115

Loan stock = $10,000

Total IE = $18,115

Short term deposits = $744

Net IE = $17,371

So, the IE that should really be used in the calculation is $18,115 NOT $17,371? (note: reported IE on P&L is $17,371).

Thanks

#4

Sorry: I omitted that subtlety.

Yes, for interest expense you net your gross interest expense and your interest income: the net amount is shown on the income statement as interest expense.

#5

I see. Clear as mud now.

Thanks

#6

My pleasure.

(Especially in FRA, sometimes you just have to remember that: this is the way they do things. There’s no logic to it, you just have to memorize the way they do it. For example: in US GAAP, interest expense is a nonoperating expense on the income statement, but interest paid is an operating cash (out)flow on the cash flow statement; that’s just the way they do things.)