Question

Using the new tax laws provided in the textbook Corporate Finance: A Focused Approach, 7th edition, by Ehrhardt & Brigham:

Molenti Motors Inc. recently reported $6 million of net income. Its EBIT was $13 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $6 million net income by 1 – T = 0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.)

Talbot Enterprises recently reported an EBITDA of $8 million and a net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?

Kendall Corners Inc. recently reported net income of $3.1 million and depreciation of $500,000. What was its net cash flow? Assume it had no amortization expense.

In its most recent financial statements, Del-Castillo Inc. reported $70 million of net income and $900 million of retained earnings. The previous retained earnings were $855 million. How much dividends did the firm pay to shareholders during the year?

Answer 1

1). Molenti Motors:

Earnings before tax (EBT) = Net income/(1-Tax rate) = 6/(1-40%) = 10 million

Interest expense = EBIT - EBT = 13 - 10 = 3 million

2). EBT = Net income/(1-Tax rate) = 2.4/(1-40%) = 4 million

EBIT = EBT + interest expense = 4 + 2 = 6 million

D&A = EBITDA - EBIT = 8 - 6 = 2 million

3). Net cash flow = net income + depreciation = 3.1 + 0.5 = 3.6 million

4). Increase in retained earnings = this year's retained earnings - last year's retained earnings

= 900 - 855 = 45 million

Dividend paid this year = net income - addition to retained earnings

= 70 - 45 = 25 million