Edge Brothers recently reported net income of $385,000. The tax rate is 40 percent. The company's interest expense was $200,000. What would have been the company's net income if they would have been able to double their operating income (EBIT), assuming that the company's tax rate and interest expense remain unchanged?
A) $ 770,000
B) $ 890,000
C) $ 920,000
D) $1,100,000
E) $1,275,000

Question

Quizplus · Accepted Answer

To find the new net income, first calculate the original EBIT using the formula: Net Income = (EBIT - Interest) * (1 - Tax Rate). Rearranging gives EBIT = (Net Income / (1 - Tax Rate)) + Interest. Plugging in the values: EBIT = ($385,000 / 0.6) + $200,000 = $841,667. Doubling EBIT gives $1,683,334. The new net income is: ($1,683,334 - $200,000) * 0.6 = $890,000.

Edge Brothers Recently Reported Net Income of $385,000