How do you calculate the EBIT for question A. Abe Forrester and three of his fri

Question

How do you calculate the EBIT for question A.

Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:

- Plan A is an all-common-equity structure in which $2.1 million dollars would be raised by selling 82,000 shares of common stock.

- Plan B would involve issuing $1.1 million in long-term bonds with an effective interest rate of 12.1 percent plus another $1.0 million would be raised by selling 41,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm's capital structure.

Abe and his partners plan to use a 34 percent tax rate in their analysis, and they have hired you on a consulting basis to do the following:

a. Find the EBIT indifference level associated with the two financing plans.

b. Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.

Explanation / Answer

Incomplete Question, only requirement is give, complete Question is missing. However, below is one of the example.

How to Calculate Earnings Before Interest and Taxes Margin:

Definition:

In accounting, EBIT margin is a measure of an organization's profit which is found as earnings before interest and tax(EBIT) divided by net revenue. It helps to identify the organization yearly growth.

Formula:

EBIT = R - E EBIT

Margin = EBIT / R

Taxable Income = EBIT - I

Tax Amount = Taxable Income x T

Net Income = Taxable Income - Tax Amount

Profit Margin = Net Income / R

Where,

R = Sales Revenue

E = Operating Expenses

I = Interest Paid

T = Tax Rate

Example :

A company has sales of $500000 with operating costs of $450000, interest paid of $6000 and a tax rate of 30%. Calculate the EBIT, Net Income, and Profit Margin.

Given :

Sales Revenue (R) = $500000

Operating Expenses (E) = $450000

Interest Paid (I) = $6000

Tax Rate (T) = 30% = 0.3

To Find :

Earnings Before Interest and Taxes, Net Income and Profit Margin

Solution :

EBIT = R - E = $500000 - $450000) = $50000

EBIT Margin = EBIT / R = ($50000 / $500000) x 100 = 10 %

Taxable Income = EBIT - I = $50000 - $6000 = $44000

Tax Amount = Taxable Income x T = $44000 x 0.3 = $13200

Net Income = Taxable Income - Tax Amount = $44000 - $13200 = $30800

Profit Margin = Net Income / R = ($30800 / $500000) x 100 = 6.16 %

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