A firm has a net profits after taxes of $75,600, a 30% tax rate, a 10%...

A firm has a net profits after taxes of $75,600, a 30% tax rate, a 10% interest rate, and a 10 times interest earned ratio. Based on the given information, the firm earnings before interest and taxes equals?

Select one:

a. $100,000

b. $110,000

c. $130,000

d. $120,000

Expert Solution


				$
1)	Calculation of Earnings Before Tax (EBT)
	Earnings After Tax		75600
	Add: Tax @ 30%		32400
		75600 *30/70
	Earnings Before Tax		108000
	(EBT)
2)	Calculation of Earnings Before Interest andTax (EBIT)
	Interest earned ratio	=	EBIT/Interest expenses

	EBIT		=	EBT + Interest expenses

	Let Interest expense be x
	Interest earned ratio	=	10 times

	Interest earned ratio	=	EBIT/Interest expenses
	Interest earned ratio	=	EBT + Interest expenses/Interest expenses
	10		=	108000 + X
				X
	10 X		=	108000 + X
	10 X - X		=	108000
	9 X		=	108000
	X		=	108000/9
	X		=	12000
	Interest Expense	=	1200

	EBT + Interest Expense	=	108000+12000
	EBIT		=	120000

	Earnings Before Interest and Tax is	120000

	Option d) $ 120000 is correct

jeff jeffy answered 2 years ago

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