Question

Smashed Pumpkins Co. paid $184 in dividends and $610 in interest over the past year. The company increased retained earnings by $510 and had accounts payable of $666. Sales for the year were $16,475 and depreciation was $744. The tax rate was 40 percent.

Required:
1. What was the company's EBIT?

Answer 1

Answer: $1,766.67

Step-by-step explanation:

Alright then.

First we will calculate the Earnings after tax by using the retained earnings and dividends as dividends are shared after tax.

After tax profit = Retained Earnings + Dividends.

= 510 + 184

= $694

Now we add the tax back. That looks something like,

694 = (1 - T) * x

x = 694/1 - T

x = 694 / 1 - 0.4

x = 1156.66666667

Earnings before tax was $1,156.67

Now we add the Interest back to get EBIT

= 1,156.67 + 610

= $1,766.67

$1,766.67 was the company's EBIT.

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