The interest considered in NI or EBIT

CFA Level II
#1

Net Income = (EBIT - Interest)*(1-Tax%)

Is the interest here referring to the net interest expense that we need to pay? (so the negative sign already accounted for the fact that it is an expense?)

So if interest expense is 10, then we put (EBIT - 10)*(1-Tax%)

What if we have interest income (from investment), and it exceeds our interest expense, so lets say we receive $5 of net interests after paying to debt holder, we do need to put -$5 in the equation? i.e. (EBIT+5)*(1-Tax%)

Thank you!

#2

Bump

#3

Yes: it’s treating a $10 interest expense as a positive $10, and subtracting it. If your interest income exceeds your interest outgo, then that number will be negative; subtracting a negative number increases EBT.

#4

Thanks a lot magician!

#5

You’re welcome.