Dharma Supply has earnings before interest and taxes (EBIT) of $591,000, interest expenses of $255,000 and faces a corporate tax rate of 36 percent.
a. What is Dharma Supply's Net Income?
b. what would dharmas net income be if it didn't have any debt?
c. what are the firms interest tax savings?
a. Net Income = 591,000 - 255,000 - 0.36*591,000 =
b. $591,000.
c. 0.36 * 591000 =
To find the answers to these questions, we need to follow a few steps.
a. To calculate Dharma Supply's Net Income, we need to subtract the interest expenses and taxes from the EBIT.
Step 1: Calculate Earnings Before Taxes (EBT).
EBT = EBIT - Interest Expenses
= $591,000 - $255,000
= $336,000
Step 2: Calculate Net Income.
Net Income = EBT * (1 - Tax Rate)
= $336,000 * (1 - 0.36)
= $336,000 * 0.64
= $215,040
So, Dharma Supply's Net Income is $215,040.
b. If Dharma Supply didn't have any debt, there would be no interest expenses. Therefore, we can directly calculate the Net Income:
Net Income (without debt) = EBIT * (1 - Tax Rate)
= $591,000 * (1 - 0.36)
= $591,000 * 0.64
= $377,440
So, Dharma Supply's Net Income without any debt would be $377,440.
c. The interest tax savings can be calculated by finding the difference between the net income in part a (with debt) and part b (without debt):
Interest Tax Savings = Net Income (with debt) - Net Income (without debt)
= $215,040 - $377,440
= -$162,400
Therefore, the firm's interest tax savings would be -$162,400, indicating a decrease in taxes paid due to the interest expense.