A firm has revenue of $60,000, its total operating costs including depreciation

Question

A firm has revenue of $60,000, its total operating costs including depreciation and cost of goods sold are $50,620, depreciation is $4,620 and its interest expense on outstanding loans is $2,000. What is the firm’s EBIT?

$55,380 $2,760 $9,380 $12,000

2. . Suppose you could borrow using either a credit card that charges 1% per month or a bank loan that quotes a nominal rate of 12% compounded quarterly. Which should you choose to get a lower rate?

Bank Loan Credit Card both have the same rate of EFF% Neither. You should issue commercial paper that pays 25%.

Explanation / Answer

1. EBIT is Earnings before Intesrest and Taxes = Revenue - Total Operating Costs

EBIT = 60,000 - 50,620 = 9,380

2. Convert both the scenarios into effective annual rates

1% per month = (1.01^12)-1 = 0.1268 = 12.68 %

12% compounded quarterly = 12%

So one should opt for 12% annual rate compunded quarterly.

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