Smashed Pumpkins Company paid $104 in dividends and $540 in interest over the past year. The company increased retained earnings by $450 and had accounts payable of $546. Sales for the year were $16,125 and depreciation was $704. The tax rate was 21 percent. What was the company's EBIT?
Question
Smashed Pumpkins Company paid 540 in interest over the past year. The company increased retained earnings by 546. Sales for the year were 704. The tax rate was 21 percent. What was the company's EBIT?
Solution
To calculate the Earnings Before Interest and Taxes (EBIT) for Smashed Pumpkins Company, we need to use the following formula:
EBIT = Sales - Operating Expenses + Non-operating Income
However, in this case, we don't have all the information needed to directly use this formula. We don't have the total operating expenses, but we do have some components of it (dividends, increase in retained earnings, and depreciation). We also don't have the non-operating income.
But we can use the information given to find the Net Income first, and then add back the interest and taxes to find the EBIT.
Here's how:
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Find the Net Income: We know that Net Income = Dividends + Increase in Retained Earnings. So, Net Income = 450 (increase in retained earnings) = $554.
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Find the Taxes: We know that Taxes = Tax Rate * (Net Income + Interest). So, Taxes = 21% * (540 (interest)) = $229.74.
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Find the EBIT: We know that EBIT = Net Income + Interest + Taxes. So, EBIT = 540 (interest) + 1323.74.
So, the EBIT for Smashed Pumpkins Company is $1323.74.
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