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 find the answers to these questions, we need to use the following formula:
Net Income = (EBIT - Interest Expenses) * (1 - Tax Rate)
Now let's apply this formula to the given information.
a. To find Dharma Supply's net income, we will substitute the following values into the formula:
EBIT = $500,000
Interest Expenses = $300,000
Tax Rate = 35%
Net Income = ($500,000 - $300,000) * (1 - 0.35)
Net Income = $200,000 * (0.65)
Net Income = $130,000
Therefore, Dharma Supply's net income is $130,000.
b. To calculate Dharma Supply's net income if it didn't have any debt and no interest expense, we will simply use the EBIT and Tax Rate values in the formula:
EBIT = $500,000
Interest Expenses = $0
Tax Rate = 35%
Net Income = ($500,000 - $0) * (1 - 0.35)
Net Income = $500,000 * (0.65)
Net Income = $325,000
Therefore, if Dharma Supply didn't have any debt and consequently no interest expense, its net income would be $325,000.
Resource:
To understand more about computing interest tax savings, you might find it useful to refer to finance or accounting textbooks, or online resources like Investopedia, which provide detailed explanations and examples on this topic.