Question

The following data are for the 2016 fiscal year of Alphabet, Inc., which is the parent company of Google, Inc., and Facebook, Inc. All dollar amounts are in thousands.

Account Title	Alphabet, Inc.	Facebook, Inc.
Current assets	$105,408	$34,401
Total assets	167,497	64,961
Current liabilities	16,756	2,875
Total liabilities	28,461	5,767
Stockholders’ equity	139,036	59,194
Interest expense	124	10
Income tax expense	4,672	2,301
Net income	19,478	10,217

Required

1. Calculate the EBIT for each company.
2. Calculate each company’s debt-to-assets ratio, current ratio, and the times-interest-earned ratio.
3. Calculate each company’s return-on-assets ratio using EBIT instead of net earnings. Calculate each company’s return-on-equity ratio using net earnings.
4. Alphabet reported interest expense of $124 million, before taxes. What was its after-tax interest expense in dollars? (Hint: You will need to compute its tax rate by dividing income tax expense by earnings before taxes, which must be computed.)

Answer 1

a)

EBIT of Alphabet, Inc. = Net income + Income tax expense + Interest expense

= 19,478 + 4,672 + 124

= $24,274

EBIT of Facebook, Inc. = Net income + Income tax expense + Interest expense

= 10,217 + 2,301 + 10

= $12,528

b)

For Alphabet, Inc.

Debt to assets ratio = Total liabilities/Total assets

= 28,461/167,497

= 0.17

Current ratio = Current assets/Current liabilities

= 105,408/16,756

= 6.29

Times interest earned = EBIT/Interest expense

= 24,274/124

= 195.76

For Facebook, Inc.

Debt to assets ratio = Total liabilities/Total assets

= 5,767/64,961

= 0.09

Current ratio = Current assets/Current liabilities

= 34,401/2,875

= 11.97

Times interest earned = EBIT/Interest expense

= 12,528/10

= 1,252.8

c)

For Alphabet, Inc.

Return on assets = EBIT/Total assets

= 24,274/167,497

= 14.49%

Return on equity = Net income/Equity

= 19,478/139,036

= 14%

For Facebook, Inc.

Return on assets = EBIT/Total assets

= 12,528/64,961

= 19.28%

Return on equity = Net income/Equity

= 10,217/59,194

= 17.26%

d)

Earnings before tax = Net income + Income tax expense

= 19,478 + 4,672

= $24,150

Income tax rate = Income tax expense/Earnings before tax

= 4,672/24,150

= 19.35%

After-tax interest expense in dollars = interest expense x (1 - tax rate)

= 124 x (1 - 0.1935)

= $100

Note: Exact answers may slightly vary due to rounding off.