The MAX Corporation is planning a $4 million expansion this year. The expansion can be financed by issuing either common stock or bonds. The new common stock can be sold for $60 per share. The bonds can be issued with a 12% coupon rate. The firm's existing shares of preferred stock pay dividends of $2.00 per share. The company's corporate income tax rate is 46%. The company's balance sheet prior to expansion is as follows: MAX Corporation Current assets $ 2,000,000 Fixed assets 8,000,000 Total assets $10,000,000 Current liabilities $ 1,500,000 Bonds: (8%, $1,000 par value) 1,000,000 (10%, $1,000 par value) 4,000,000 Preferred stock: ($100 par value) 500,000 Common stock: ($2 par value) 700,000 Retained earnings 2,300,000 Total liabilities and equity $10,000,000 a. Calculate the indifference level of EBIT between the two plans. b. If EBIT is expected to be $3 million, which plan will result in higher EPS?
How to calculate the break even of EBIT
Net income + income tax + interest expense or Add together all expenses, then - interest expense - income tax
To locate the EBIT on an income statement, look for the line item that shows operating income or operating profit. EBIT is calculated by subtracting operating expenses from gross revenue.
If a firm has no leverage, its EBIT (Earnings Before Interest and Taxes) is equivalent to its operating income. This means that EBIT reflects the firm's earnings generated from its core business operations, without any interest expenses or tax considerations affecting the calculation. Essentially, for an unleveraged firm, EBIT simplifies to the total revenue minus operating expenses.
Its normally EBITDA and yes it is.
How to calculate the break even of EBIT
EBIT means "Earnings Before Interests and Taxes"
ebit diagram
Leverage means to get more with little force as in physics. But in accounting it tells us how we can know from our sales that how much EBIT (earnings before interest and taxes) will be. In acc it is called degree of leverage and is calculated as DOL= contribution margin/EBIT For exp, if DOL=2 It means if we increase sale by 5% EBIT will increase by (2*5%) 10%. ok dear pray for me
Net income + income tax + interest expense or Add together all expenses, then - interest expense - income tax
To calculate the break-even level for Earnings Before Interest and Taxes (EBIT), you first need to identify your fixed costs and variable costs per unit, as well as the selling price per unit. The break-even point in terms of units can be determined using the formula: Break-even units = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Once you have the break-even units, you can find the break-even EBIT by multiplying the number of break-even units by the contribution margin (Selling Price - Variable Cost). This gives you the EBIT level at which total revenues equal total costs, resulting in zero profit.
Breakeven point = Fixed cost / contribution margin ratio contribution margin ratio = sales - variable cost / sales.
To locate the EBIT on an income statement, look for the line item that shows operating income or operating profit. EBIT is calculated by subtracting operating expenses from gross revenue.
If a firm has no leverage, its EBIT (Earnings Before Interest and Taxes) is equivalent to its operating income. This means that EBIT reflects the firm's earnings generated from its core business operations, without any interest expenses or tax considerations affecting the calculation. Essentially, for an unleveraged firm, EBIT simplifies to the total revenue minus operating expenses.
Increasing interest expense will decrease EBIT (Earnings Before Interest and Taxes) as it directly reduces the company's profitability by deducting the interest payment from the operating income. This results in lower EBIT margins and reduced earnings available to shareholders.
decrease it
Ebit is found by looking at your bottom line (i.e. net income) on an income statement, and then adding back the interest expense and income tax expense (if applicable, flow through entities do not pay taxes). The reason for EBIT is to tell the interested party how effective a business is at doing what it is supposed to do by factoring out non-operational expenses. Another variant of EBIT is EBITDA which is even leaner, and additionally factors out depreciation and amortization. (I answered)