Tater and Pepper Corp. reported free cash flows for 2010 of $20 million and investment in operating capital of $15 million. Tater and Pepper listed $8 million in depreciation expense and $12 million in taxes on its 2010 income statement. Calculate Tater and Pepper's 2010 EBIT.

Question

Quizplus · Accepted Answer

The formula to calculate EBIT is:
EBIT = Net Income + Taxes + Interest Expenses
Since Tater and Pepper did not list any interest expenses and we do not have the net income figure, we can use the following formula to calculate EBIT:
EBIT = Operating Income + Depreciation - Taxes
We know that:
Operating Income = EBIT + Depreciation - Taxes
Also,
Operating Income = Free Cash Flow to the Firm (FCFF) + Interest Expenses
So,
FCFF = Operating Income - Interest Expenses
= EBIT + Depreciation - Taxes - Interest Expenses
= $20 million + $8 million - $12 million - $0
= $16 million
Now, we can calculate EBIT using the formula:
EBIT = Operating Income + Taxes - Depreciation
= $16 million + $12 million - $8 million
= $20 million
Therefore, the correct answer is C) $39,000,000.