Net income is equal to? A) EBIT - EBT + $Interest + tax%*EBT B) EBIT - $Interest - EBIT * tax% - $Interest * tax% C) EBT + $Interest * (1-tax%) D) EBT * (1-tax%) + $Interest (1-tax%)
hmmm… I’d guess A
B Takes into account taxes on EBIT and taxes on interest, so that’s my guess. I would try to justify mathematically, but would probably fail and I’m out the door to work anyways! Good question though, definitely made me think for a bit (hopefully think enough so that I chose the correct option). EDIT - 5 seconds later and I think I’m wrong. I think taxes on interest are wrong here - being that they are tax deductible and all. Have to think this through a bit more. -Stillwagon
A. EBIT 10 EBT 9 so intrest = 1 tax rate .35 10 - 9 +1 + (9 * .35) = 5.15 or EBIT - interest = EBT * (1-t) = ni 10 - 1 = 9 * .65 = 5.15
Answer is not A.
interesting that my math somehow worked in my head… data mining i guess
B should be the answer. EBIT - $Interest - EBIT * tax% - $Interest * tax% Let’s condense this shall we? EBIT - Interest = EBT EBIT * tax% - $Interest * tax% = (EBIT - Interest) * Tax = EBT * Tax NI = EBT - (EBT * Tax) Remember Interest is tax deductible (that is also why debt financing is cheaper than equity).
intelectual propert belongs to me…I made it up, but looks good
Dreary Wrote: ------------------------------------------------------- > intelectual propert belongs to me…I made it up, > but looks good Nice one Dreary, but which one is the correct?
I don’t like any of them
EBIT - $Interest - EBIT * tax% - $Interest * tax% This would work if the last term was added, not substracted
Something is missing, either () or + instead of - Answer should be B since “EBIT * tax% - $Interest * tax%” is just EBT * tax% So NI = EBIT - interest - tax
D. EBT (1-T) + the interest tax savings of I(1-T) is what goes to the bottom line. and after 5 sec. i take that back.
map1 is right as usual… answer well explained by toniwestern, but it should have been “+” at the end. Sorry for that. But now with the correcetd version, it should be good for understanding EBIT, EBT, etc, and will be good for undertanding DuPont. Should be: EBIT - $Interest - EBIT * tax% + $Interest * tax% Don’t get upset if you tried, it is worth the effort !
darn…it was a good question if not for that “+” sign…
ahh yes it should be the plus sign - good catch. I hope you’re not the person who actually designed the questions for this June’s CFA1 exam, else I’ll be screwed! haha