Question

An all-equity firm reports a net profit margin of 10% on sales of $3 million. if the tax rate is 40%, what is the pretax profit

a. $100,000
b. $300,000
c. $500,000
d. $800,000

Answer 1

The net profit margin of 10% implies a net profit of 3,000,000 x 10% = 300,000.
The pretax profit is profit before tax.
If the tax rate is 40%, we can take 300,000 / (1-0.4) = 500,000 (C)
We can confirm by multiplying 500,000 * 60% = 300,000.