Question

If a corporation has a large annual interest rate and tax expenses, then EBITDA will be:

A. Less than EBIT

B. Greater than free cash flow

C. Equal to free cash flow

D. Equal to EBIT

E. None of the above

Answer 1

EBITDA means earnings before interest, taxes, depreciation, and amortization

So it includes

EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization

and EBIT means Earnings before Interest and Taxes

EBIT = Net profit + Interest + Taxes

So it means EBITDA - ( Depreciation + Amortization) = EBIT

and Free Cash Flow = EBITDA – Interest – Taxes – ΔWorking Capital – Capital Expenditure + Net Borrowing

Now, in question, it is given that a corporation has a large annual interest rate and tax expenses

So Capital Expenditure can not be zero

So Free Cash flow is less than EBITDA (which is not in option)

Now Depreciation and Amortization will be zero so which means EBITDA is equal to EBIT

that is option D.