Companies generate from their regular operations and from other sources like int

Question

Companies generate from their regular operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindely textiles recently reported $50,000 of sales $7,250 of operating costs other thandepreciation, and $1000 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?

A. 42,597

b.40.056

c. 40,903

d. 41,750

e. 39,209

Explanation / Answer

sales = 7250

costs = 7250

depriciation = 1000

interest = 8000 * 7.5% = 600

operating income = (sales - costs - depriciation - interest ) * (1- tax rate) + depriciation

= (50000 - 7250 - 1000 - 600) * (1-40%) + 1000

= $25,690

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