Question
In: Finance
Last year Almazan Software reported $10.500 million of sales, $6.250 million of operating costs other than...
Last year Almazan Software reported $10.500 million of sales, $6.250 million of operating costs other than depreciation, and $1.300 million of depreciation. The company had $5.000 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.670 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. (Round your final answer to 3 decimal places.)
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Solutions
Expert Solution
Correct answer is e. -$ 0.503
Working
| Particulars | Amount (In $'s Millions) | Proposed Amount (In $'s Millions) |
| Sales | 10.500 | 10.500 |
| Less: Operating Cost other than Depreciation | 6.250 | 6.250 |
| Earnings before Interest Tax & Depreciation (EBITDA) | 4.250 | 4.250 |
| Less: Depreciation | 1.300 | 1.970 |
| Earnings before Interest & Tax (EBIT) | 2.950 | 2.280 |
| Less : Interest ( 5.000* 6.5%) | 0.325 | 0.325 |
| Earnings before Tax (EBT) | 2.625 | 1.955 |
| Less : Tax @25% | 0.656 | 0.489 |
| Earnings after Tax (EAT) | 1.969 | 1.466 |
Net Income Changes = $1.466 - $1.969 = -$0.503
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