At end of 2017, KIA had annual net profit of $1,500,000 from automobile sales and paid corporate tax of 40% and interest expenses $250,000

Finance Aug 13, 2020

At end of 2017, KIA had annual net profit of $1,500,000 from automobile sales and paid corporate tax of 40% and interest expenses $250,000. Therefore, the Earnings Before Interest and Tax (EBIT) will be: Select one: O a. $2,500,000 O b. $3,000,000 O c. $2,250,000 O d. $2,750,000

Expert Solution

Let the EBIT be X

S.no	Particulars	Amount
A	Earning Before interest and Tax ( EBIT)	X
B	Interest	$250,000
C	Earning Before Tax( A-B)	X-$ 250000
D	Tax @ 40% On C	0.4( X-$ 250000)
E	Earning after Tax( C-D)	0.6( X-$250000)

Given Earning after tax ( Net income ) = $ 1500000

Let us equate the both numbers inorder to get X

$ 1500000 = 0.6( X-$250000)

$ 1500000/0.6 = X-$ 250000

$ 2500000+$ 250000 =X

X = $ 2750000

Hence EBIT is $ 2750000. So option d is correct.

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