Question

G. Grothe, Incorporated has the following data: Assets: $550,000 Interest rate: 6% Debt ratio: 31% Total Assets turnover: 1.8 Tax rate: 21% Profit margin: 11% What is the company's EBIT?

Answer 1

Calculation of Company's EBIT(earnings before interest and tax):

Given Assets turnover ratio =1.8

Assets turnover = sales / net assets

Given net assets =$550,000

1.8 = sales /$550,000

Sales = $990,000

Profit margin =11%

So profit (EAT) =$990,000*11%= $108,900

So EAT means earnings after interest and tax , we need to calculate earnings before interest and tax, so we need to do reverse calculation.

Given tax rate =21%

Above profit after tax is after deduction of tax, so before deduction of tax amount is

$108,900*(100/79) = $137,848.10

So earnings before tax (EBT) = $137,848.10

And given interest rate =6%

Debt ratio =31%

Debt ratio =debt /total assets

31% = Debt / $550,000

so debt =$550,000*31% = $170,500

Interest =$170,500*6% = $10,230

So EBIT will be EBT + interest

So EBIT = $137,848.10+ $10,230 = $148,078.1