Question

Santa, Inc. recently reported thats its earnings per share were $2.00. The company has 200,000 shares of stock outstanding. Interest expense was $200,000. The corporate tax rate is 10%. What is the company's operating income (EBIT)?

Answer 1

The company's operating income, or earnings before interest and taxes (EBIT), is calculated by starting with net income derived from the EPS and adjusting for interest and tax effects. The EBIT for Santa, Inc. is calculated as $666,666.67.

Step-by-step explanation:

To calculate the company’s operating income, or earnings before interest and taxes (EBIT), we start with the given earnings per share (EPS) and work backwards, adjusting for interest and taxes. With an EPS of $2.00 and 200,000 shares outstanding, we can calculate that the company's net income is $400,000 (200,000 shares × $2.00 per share).

Since interest is a non-operating expense that is deducted to arrive at net income, we add back the interest expense of $200,000 to the net income to get a pre-tax income of $600,000. Finally, considering a corporate tax rate of 10%, we deduce that taxes paid would be 1/9 of the pre-tax income because net income is after taxes have been subtracted (10% tax on the remaining 90%). Adding the tax effect back to the pre-tax income ($600,000 + $66,666.67), we arrive at an EBIT of $666,666.67.