Question

You invest $8,000 in an on-line bookstore in the form of a corporation on Jan. 2. For the sake of simplicity, you are the only shareholder who owns this corporation. You also decide to take on $10,000 liabilities with 20% annual interest rate. You spend $6,000 cash to buy books as the inventory. Throughout the year, you sell half of books to students in exchange for $9,000 cash, that is, your revenue is $9,000 and COGS is $3,000. Also, $2,000 cash dividend is paid at the end of the year. Tax rate is 40%.

All entries of balance sheet are zero at the beginning of the year (Jan. 1).

What is earnings before taxes and interest (EBIT) during the year?

Answer 1

Given,

Revenue = $9000

COGS = $ 3000

To calculate EBIT, one need to calculate gross profit and from gross profit one can deduct the operating expense to arrive at EBIT.

As one can see, there are no operating expense given in the question, hence in this example gross profit becomes the EBIT

Hence, EBIT = Revenue - COGS

= $9000 - $ 3000

= $6000

Therefore, EBIT = $3000.