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New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000...

New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of stock outstanding. The company's interest expense was $500,000. The corporate tax rate is 40 percent. What was the company's operating income (EBIT)?

a. $ 980,000

b. $1,220,000

c. $2,000,000

d. $2,500,000

e. $3,500,000

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Expert Solution

Answer is Option d. $2,500,000

Earnings per Share (EPS) = $3.00

Number of shares outstanding = 400,000

Hence, Net Income = EPS * Number of Shares outstanding = 3 * 400,000 = 1,200,000

Now, Net income = Earnings before tax * (1 - tax rate)

Tax rate = 40%

=> Earnings before tax (EBT) = 1,200,000/(1 - 40%) = $2,000,000

EBIT = EBT + Interest Expense

EBIT = $2,000,000 + $500,000 = $2,500,000. Answer is Option d

jeff jeffy answered 2 years ago
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