Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Related questions
Question
![### Sample Finance Problem – Calculation of Operating Income
**Problem Statement:**
Rao Construction recently reported $28.00 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 25%. What was Rao's operating income, or EBIT, in millions?
**Options:**
a. $15.40
b. $11.81
c. $12.40
d. $8.85
e. $18.40
---
**Solution Explanation:**
The operating income, or Earnings Before Interest and Taxes (EBIT), is calculated by subtracting operating costs and depreciation from sales. Here's the step-by-step calculation:
1. **Sales:** $28.00 million
2. **Operating Costs (other than depreciation):** $12.60 million
3. **Depreciation:** $3.00 million
**Formula for Operating Income:**
\[ \text{Operating Income (EBIT)} = \text{Sales} - \text{Operating Costs} - \text{Depreciation} \]
**Calculation:**
\[ \text{EBIT} = \$28.00 \, \text{million} - \$12.60 \, \text{million} - \$3.00 \, \text{million} \]
\[ \text{EBIT} = \$12.40 \, \text{million} \]
Thus, the operating income (EBIT) for Rao Construction is **$12.40 million**.
Therefore, the correct answer is:
**c. $12.40**
For educational purposes, let's illustrate the calculation visually in a step-by-step manner:
### Step-by-Step Visual Explanation:
1. **Sales Revenue:**
- Represented by a full bar of $28.00 million.
2. **Subtract Operating Costs:**
- A segment of $12.60 million is removed from the $28.00 million bar.
3. **Subtract Depreciation:**
- An additional segment of $3.00 million is removed from the remaining amount.
4. **Resulting in Operating Income (EBIT):**
- The final segment left represents $12.40 million.
This visually breaks down how the sales revenue is reduced by operating](https://content.bartleby.com/qna-images/question/13ffb487-410c-4808-947c-8212d0ee5563/d1df746f-ee66-44bc-9851-d6442133e52a/7jlmobq_processed.png)
Transcribed Image Text:### Sample Finance Problem – Calculation of Operating Income
**Problem Statement:**
Rao Construction recently reported $28.00 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 25%. What was Rao's operating income, or EBIT, in millions?
**Options:**
a. $15.40
b. $11.81
c. $12.40
d. $8.85
e. $18.40
---
**Solution Explanation:**
The operating income, or Earnings Before Interest and Taxes (EBIT), is calculated by subtracting operating costs and depreciation from sales. Here's the step-by-step calculation:
1. **Sales:** $28.00 million
2. **Operating Costs (other than depreciation):** $12.60 million
3. **Depreciation:** $3.00 million
**Formula for Operating Income:**
\[ \text{Operating Income (EBIT)} = \text{Sales} - \text{Operating Costs} - \text{Depreciation} \]
**Calculation:**
\[ \text{EBIT} = \$28.00 \, \text{million} - \$12.60 \, \text{million} - \$3.00 \, \text{million} \]
\[ \text{EBIT} = \$12.40 \, \text{million} \]
Thus, the operating income (EBIT) for Rao Construction is **$12.40 million**.
Therefore, the correct answer is:
**c. $12.40**
For educational purposes, let's illustrate the calculation visually in a step-by-step manner:
### Step-by-Step Visual Explanation:
1. **Sales Revenue:**
- Represented by a full bar of $28.00 million.
2. **Subtract Operating Costs:**
- A segment of $12.60 million is removed from the $28.00 million bar.
3. **Subtract Depreciation:**
- An additional segment of $3.00 million is removed from the remaining amount.
4. **Resulting in Operating Income (EBIT):**
- The final segment left represents $12.40 million.
This visually breaks down how the sales revenue is reduced by operating
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 3 steps
Knowledge Booster
Similar questions
- Your firm has total sales of $1,700. Operating Costs are $745, excluding depreciation and taxes, and operating- related depreciation is $155. The tax rate is 20%. What is the operating cash flow? A. $460. B. $600. C. $640. D. $800. E. $955.arrow_forwardNeed Helparrow_forwardThis year, FCF Inc. has earnings before interest and taxes of $9,630,000, depreciation expenses of $1,200,000, capital expenditures of $1,700,000, and has increased its net working capital by $600,000. If its tax rate is 35%, what is its free cash flow?arrow_forward
- Lever Age pays an 9% rate of interest on $9.70 million of outstanding debt with face value $9.7 million. The firm's EBIT was $2.3 million. a. What is its times interest earned? (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Times interest earned 0.03 X b. If depreciation is $170,000, what is its cash coverage ratio? (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Cash coverage ratio 0.03 Xarrow_forwardH3. Please show proper step by step calculationarrow_forwardProvide the Correct answerarrow_forward
- Need all three partsarrow_forwardMao Construction recently reported $20.50 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. What was Mao's operating income, or EBIT, in millions? * $4.90 $3.97 $3.57 $4.41 O $3.21arrow_forwardA firm has sales of $96,400, costs of $53,800, interest paid of $2,800, and depreciation of $7,100. The tax rate is 34 percent. What is the value of the cash coverage ratio? ○ Al 1727 B) 1521 12.68 D) 12.14 0日 23.41arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education