Pls explain and prodive a resource to fine equation.
Computing interest tax savings.Dharma Supply has earnings before interest and taxes (EBIT) of $500,000, interest expenses of $300,000, and faces a corporate tax rate
of 35%.
a. What is Dharma Supply’s net income?
b. What would Dharma’s net income be if it didn’t have any debt (and consequently no
interest expense)?
To calculate Dharma Supply's net income and compare it with and without debt, we need to consider the formula for net income and the impact of interest expenses on it.
a. To calculate Dharma Supply's net income with debt, we can use the following formula:
Net Income = EBIT - Interest Expense - Tax Expense
Given:
EBIT = $500,000
Interest Expense = $300,000
Tax Rate = 35%
First, we calculate the Tax Expense:
Tax Expense = Tax Rate x (EBIT - Interest Expense)
Tax Expense = 0.35 x ($500,000 - $300,000)
Tax Expense = 0.35 x $200,000
Tax Expense = $70,000
Now, we can calculate the Net Income:
Net Income = EBIT - Interest Expense - Tax Expense
Net Income = $500,000 - $300,000 - $70,000
Net Income = $130,000
Therefore, Dharma Supply's net income with debt is $130,000.
b. To calculate Dharma Supply's net income without debt, we need to eliminate the interest expense. The formula for calculating net income without debt is the same as above, but with zero interest expense.
Net Income without Debt = EBIT - 0 - Tax Expense
Using the same values as above, we can calculate the Net Income without Debt:
Net Income without Debt = $500,000 - $0 - $70,000
Net Income without Debt = $430,000
Therefore, Dharma Supply's net income without debt is $430,000.
If you need a resource to learn more about the calculation of net income and the impact of interest expenses, you can refer to accounting textbooks or online resources such as Investopedia or accounting courses on platforms like Coursera or Khan Academy.