Question

A firm has earnings per share of $2.12 on 40,000 shares outstanding. The firm also has $360,000 in debt at a cost of 9%. Ignore taxes. What is the EBIT?

A) $117,200 B) $91,600 C) $119,700 D) $84,800 E) $102,300

Answer 1

Option (a) is correct

First we will calculate net income or profit after tax

Earnings per share = $2.12

No. of shares outstanding = 40000

Earnings per share = Net income / No. of shares outstanding

$2.12 = Net income / 40000

Net income (Profit after tax) = $2.12 * 40000 = $84800

Next we will calculate Earnings before interest and tax (EBIT)

Interest expense = $360000 * 9% = $32400

Now, Net income (Profit after tax) = EBIT - Interest expense

Putting these values in the above equation, we get,

$84800 = EBIT - $32400

EBIT = $84800 + $32400

EBIT = $117200