pre tax income = EBT and it includes all expenses EXCEPT tax. a I/S will look like this EBIT - int exp = EBT - taxes paid net income EPS = net/shares out.
pepp Wrote: ------------------------------------------------------- > strangedays Wrote: > -------------------------------------------------- > ----- > > strangedays Wrote: > > > -------------------------------------------------- > > > ----- > > > Pepps, > > > it shoud be: > > > > > > Pre-tax Income (for example 2006)=1789 > > > > > > adjust for expensed interest: 141 > > > > > > Pre-tax Income (adjusted)= 1,648 > > > > > > After Tax(1-0.35)=1,071 > > > > > > > > > However, the data in the question do not > appear > > > consistent. I mean, if you just calculate the > > net > > > profit from the pre-tax profit doesnt > > reconcile. > > > > > > I think the question is not clear. I mean, is > the > > amortization quote refering to prior years or > this > > year? Because things would be different. > > Strange, > > This year, why would prior year amortization > affect this year’s NI? it’d wouldn’t. Exactly, so in this case should be: > Pre-tax Income (for example 2006)=1789 > > > > > > adjust for expensed interest: 141+47 > > > > > > Pre-tax Income (adjusted)= 1,601 > > > > > > After Tax(1-0.35)=1,041 Note: Looking at the data of the question Pre tax income= 1789 tax = 626 Net Income =1,163 while it is reported 930. The data are clearly wrong
Agree with you strange but thats what the book says. This question is STRAIGHT FROM THE BOOK 3. PAGE 377! Take a look at the solution. i think cfa institute needs to add to errata, because I just wasted 1 hr figuring out that the solution is incorrect.
> Note: Looking at the data of the question > Pre tax income= 1789 > tax = 626 > Net Income =1,163 while it is reported 930. The > data are clearly wrong GOOD EYE, DUDE!
Additionally for this question the book is adding Income Expense + Pretax Income = EBIT
so, it seems as was right afterall, uh?
Yep, so it should be EBIT= Net Income + Interest expenses (930 +401) =1071 EBIT- (Capitalized interest+ interest expenses)= Pre-tax Income = 1071-141+47=977
strangedays Wrote: ------------------------------------------------------- > Yep, so it should be > > EBIT= Net Income + Interest expenses (930 +401) > =1071 > > EBIT- (Capitalized interest+ interest expenses)= > Pre-tax Income = 1071-141+47=977 can you do it step by step? 930 + 401 = 1331!
Sorry it should be EBIT= Net Income + Capitalized Interest expenses (930 +401) =1071 EBIT- (Capitalized interest+ interest expenses)= Pre-tax Income = 1071-141+47=977
strangedays Wrote: ------------------------------------------------------- > Sorry it should be > > EBIT= Net Income + Capitalized Interest expenses > (930 +401) =1071 930 + 401 is not 1071! > > EBIT- (Capitalized interest+ interest expenses)= > Pre-tax Income = 1071-141+47=977
daj224 Wrote: ------------------------------------------------------- > strangedays Wrote: > -------------------------------------------------- > ----- > > Sorry it should be > > > > EBIT= Net Income + Capitalized Interest > expenses > > (930 +401) =1071 > > > 930 + 401 is not 1071! > > > > > EBIT- (Capitalized interest+ interest > expenses)= > > Pre-tax Income = 1071-141+47=977 Sorry again, yep the calculation was wrong but the formula is correct I think
Why aren’t you accounting for current year amortization?? information supplied by question Interest Expense = 401 Pretax Income = 1789 Net Income = 930 Capitalized Interest = 141 Amortization of interest = 47 Tax Rate = 35% EBIT = Pretax Income + Interest expense = 2190 Adjustments EBIT = 2190 + 47 (amortization) = 2237 Interest Expense = 401 + 141 = 542 Pretax Income = EBIT - Interest Expense = 1695 Tax = .35 * 1695 NI = 1101.7 That’s what I get. Book gets the answer of 869. and they dont show you how they get it.
pepp Wrote: ------------------------------------------------------- > Why aren’t you accounting for current year > amortization?? > > > information supplied by question > > Interest Expense = 401 > Pretax Income = 1789 > Net Income = 930 > Capitalized Interest = 141 > Amortization of interest = 47 > Tax Rate = 35% > EBIT = Pretax Income + Interest expense = 2190 > > > Adjustments > EBIT = 2190 + 47 (amortization) = 2237 > Interest Expense = 401 + 141 = 542 > Pretax Income = EBIT - Interest Expense = 1695 > Tax = .35 * 1695 > NI = 1101.7 > > That’s what I get. > > Book gets the answer of 869. and they dont show > you how they get it. Pepps you are right. However, I think the adjustment is more complex, as I see they take some percentage related to the year (however, in Stalla they just mension it, therefore I think it is not very relevant for the test)
The difference between NI and EBT does not exactly get to 35% of EBT because probably there were DTL/DTAs (remember effective and statutory taxes?). Should the interest be expensed as incurred and not capitalized, the NI would have been lower by (1-tax rate)*Capitalized interest, deduct this from the NI. But part of the capitalized interest was amortized, so rather than simply expensing the entire interest, the NI was lowered with (1-tax rate)*Amortized capital interest, add it back. Total effect: Adjusted NI = Initial NI +(1-tax rate)*Amortized capital interest-(1-tax rate)*Capitalized interest = Initial NI +(1-tax rate)*( Amortized capital interest- Capitalized interest) = 930+(1-.35)*(47-141)=868.9~869
map1 Wrote: ------------------------------------------------------- > The difference between NI and EBT does not exactly > get to 35% of EBT because probably there were > DTL/DTAs (remember effective and statutory > taxes?). > > Should the interest be expensed as incurred and > not capitalized, the NI would have been lower by > (1-tax rate)*Capitalized interest, deduct this > from the NI. > > But part of the capitalized interest was > amortized, so rather than simply expensing the > entire interest, the NI was lowered with (1-tax > rate)*Amortized capital interest, add it back. > > Total effect: Adjusted NI = Initial NI +(1-tax > rate)*Amortized capital interest-(1-tax > rate)*Capitalized interest = Initial NI +(1-tax > rate)*( Amortized capital interest- Capitalized > interest) = 930+(1-.35)*(47-141)=868.9~869 Great Job map!!!
Map - you da man!
I got 869 too with the following reasoning. 1789 (pretax) * (1-0.35) = 1163 >>>>> This is 233 more than NI Now find adjusted NI = (1789 -141 +47)*(1-0.35) = 1102 >>>>but we have to adjust it downward by 233 Adj. NI = 1102 - 233 = 869