Companies generate income from their \"regular\" operations and from other sourc

Question

Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $40,000 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley's operating income, or EBIT?

Explanation / Answer

Sales
$12,500
Operating costs excluding depr'n
$7,250
Depreciation
$1,000
Operating income (EBIT)
$4,250

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