Ok I’m stuck on a very easy problem Interest Expense=401 Pretax Income=1789 Net Income=930 Capitalized Interest=141 Amortization of Capitalized interest=47 I’m stuck trying to figure out how they got 2237 for EBIT.

Sorry I forgot to mention that to assume that the company expensed interest as incurred.

EBIT in this case would = Pretax Income + Int Exp + Amortization of Cap Int. = 1789 + 448

you have the pretax income of 1789 and add the interest expense 401 plus the capitalized interest for the year 1789+401+47=2237 pretax income has had interest expenses deducted already

Pretax income is before taxes, but still includes interest. So you’re basically backing that out of the 1789 by adding it.

lol beat me by a couple of seconds eh mate…

since interest is deductible I don’t thing pretax income includes interest.

kevin002 I am still at the begining of my studies unfortunately and unsure of what I am saying

wow I just posted that about 1 minute ago (I love AF)…thanks guys.

assuming there was a 35% tax rate what would net income equal to

1162.85? pretax income -35%

The answer states $869. Remember that we are assuming the company expensed interest as incurred. I worked out a pre tax income of 1695 which is the same as the book…but they get to 869 for net income.

i can see the 1695 if the capitalized interest was all expensed either 2237-interest expense 401- capitalized interest 141 = 1695 or pretax income + amortized interest (47 addback)- 141 capitalized interest

i have no idea how they got 869 for net income though

makes sense you have net income of 930 but if you expense the whole capitalized interest your net income will be different by (+47 interest already deducted that you add back - 141 which is capitalized interest )* (1-tax rate) then you still substract from 930 - 61.1=868.9

it really depends how the question is stated

thanks florinpop

np I would have a question though the net income is not related to the pretax income because there is no 35% tax bracket relationship so I am assuming those are different questions?

well it’s all part of the same question…If you have the curriculum then flip to the practice problems on reading 36 and it’s all part of question 1.

So the correct formula for the earnings coverage ratio in part B. is: (Pretax Income+Interest Expense+Amortization of Capital Interest)/(Interest Expense+Capitalized Interest) If this is correct formula, why don’t we add Capitalized interest ($141) in the numerator and why don’t we include ACI ($47) in the denominator?