Question

INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $10 million and net income of $2.1 million. It had $3 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?

Answer 1

Sol:

EBITDA = $10,000,000

Net income = $2,100,000

Interest expense = $3,000,000

Corporate tax = 40%

To determine charge for depreciation and amortization:

EBT = Net income /(1 - Corporate tax)

EBT = 2,100,000 / (1 - 40%)

EBT = 2,100,000 / 0.60 = $3,500,000

EBITDA = EBT + Interest + Depreciation + Amortization

10,000,000 = 3,500,000 + 3,000,000 + Depreciation + Amortization

Depreciation + Amortization = 10,000,000 - 3,500,000 - 3,000,000

Depreciation + Amortization = $3,500,000

Therefore depreciation and amortization will be $3,500,000 or $3.5 million.