Tim's Playhouse paid $155 in dividends and $220 in interest expense. The addition to retained earnings is $325 and net new equity is $50. The tax rate is 25 %. Sales are $1,600 and depreciation is $160. What are the earnings before interest and taxes?

Question

Quizplus · Accepted Answer

To find the earnings before interest and taxes (EBIT), we need to calculate the net income first. The net income can be calculated as: Net Income = Addition to Retained Earnings + Dividends = $325 + $155 = $480. Since the tax rate is 25%, the pre-tax income is: Pre-tax Income = Net Income / (1 - Tax Rate) = $480 / 0.75 = $640. EBIT is calculated by adding back the interest expense to the pre-tax income: EBIT = Pre-tax Income + Interest Expense = $640 + $220 = $860.

Tim's Playhouse Paid $155 in Dividends and $220 in Interest