Question

Which of the following statements are true? Select all that apply.

1. EBIT equals EBIAT if there is no interest expense.
2. EBIAT eliminates the impact of interest and taxes from the net income.
3. EBIAT re-applies the tax rate to a pretax amount that excludes the cost of interest.
4. The term Free Cash Flow means that no outside entity has any claim on these funds.

Answer 1

The true statements are that EBIT equals EBIAT if there is no interest expense, and that EBIAT re-applies the tax rate to a pretax amount excluding the cost of interest. The statement that EBIAT eliminates the impact of interest and taxes from net income is false, as it only removes the impact of interest. Lastly, the statement that Free Cash Flow means no outside entity has any claim on these funds is also false, as it refers to cash available after certain outflows.

Step-by-step explanation:

The student is asking whether certain statements about financial measures such as EBIT (Earnings Before Interest and Taxes), EBIAT (Earnings Before Interest After Taxes), and Free Cash Flow (FCF) are true. Let's examine each in turn:

• EBIT equals EBIAT if there is no interest expense. This statement is true as EBIT is earnings before interest and taxes, so if there is no interest expense, then EBIT would be just earnings before taxes, which is essentially what EBIAT also represents when interest is not part of the equation.
• EBIAT eliminates the impact of interest and taxes from net income. This statement is false. EBIAT does eliminate the impact of interest, but not of taxes—it applies taxes after removing the influence of interest.
• EBIAT re-applies the tax rate to a pretax amount that excludes the cost of interest. This statement is true as EBIAT is calculated by subtracting interest expenses from earnings before taxes (EBT) and then applying the tax rate.
• The term Free Cash Flow means that no outside entity has any claim on these funds. This statement is false. Free Cash Flow refers to the cash that a company generates after accounting for cash outflows to support operations and maintain capital assets. It does not imply that the cash is free from all claims but rather that it is available for use by the company after such expenditures.

It's important to understand these terms when analyzing a company's financial health or making investment decisions. Each term provides insight into different aspects of a company's financial performance and potential future growth.