Basics of Corporate Finance

7. Use the information in question 6, and apply a tax rate of 40%. What is the NET INCOME available for distribution to the shareholders of this company?
_____ a) $23.6 million
_____ b) $25.8 million
_____ c) $35.4 million
_____ d) $43.0 million
_____ e) $59.0 million

8. XYZ Corporation purchases a widget maker for $750,000. The piece of equipment has an estimated useful life of ten years. Using a straight-line depreciation method, the annual amount the company can deduct as an OPERATING COST is:
_____ a) $7,500 per year
_____ b) $150,000 per year
_____ c) $1,500 per year
_____ d) $75,000 per year

ANSWER KEY

6.Suppose that a company has NET SALES of $332 million, INTEREST EXPENSES of$16 million, DEPRECIATION of $6 million, $225 million expenses for LABOR AND MATERIALS, and ADMINISTRATIVE EXPENSES of $42 million. What is the EBIT for that company?
c) $59 million
EBIT = NET SALES - OPERATING COSTS (in millions) Net Sales $332
Less:
LABOR AND MATERIALS $225 DEPRECIATION 6
A DMINISTRATIVE 42 EBIT $ 59
INTEREST EXPENSE is not an OPERATING COST