Question

Use AstroTurf Company's income statement below to answer the following questions.

Operating costs (excl. depreciations & amortization): $4.5m
Depreciation and amortization: $1.5m
Interest: $0.7m
Net Income: $2.8m
Tax Rate: 35%

1. Calculate AstroTurf’s EBITDA.
2. What level of sales would generate a net income of $4.2m for the following year, knowing that operating costs (excl. depreciation and amortization) will increase by 7.5%, and given a 35% tax rate.

Answer 1

1.

Assuming net income is after tax

Net Income (after tax) i.e, 100-35 , For 65% (a)	$ 2.8 millions
Tax 35% (2.8/65*35) (b)	1.51m
Net Income before tax (c) = a+b	4.31m
Interest (d)	0.7m
Net income before interest and tax (e)= c+d	5.01m
Depreciation and amortisation (f)	1.5m
Earnings before interst,tax depreciation and amortisation (EBITDA) = e+f	$6.51 m

2. Reverse Calculation

Sales (d) = a+b+c		$13.475m
Operating costs (4.5+7%)	4.815m
Depreciation and amortisation	1.5m
Interest	0.7m
Total expenses (c)		7.015m
Tax 35% i.e, (4.2*35/65) (b)		2.26m
Net Income 65% (100%-35%) (a)		4.2m