Question

A firm'sprofit margin when ignoring the effects of financing is 20% with an EBIT of $1.5 million and sales of $5 million. How much did the firm pay in taxes

Answer 1

Answer:

The firm paid taxes of $0.5 million

Explanation:

Profit margin is the percentage of net income to its sales. It is calculated as follow:

Profit Margin =  ( Net profit /  Sales ) x 100

20% = (Net profit / 5 million) x 100

(20/100) x 5 million = Net profit

Net profit = 1 million

EBIT is the earning before the payment of interest expense and tax. It is the net of Gross profit and operating expenses.

net income is calculates from EBIT as follow

Net Income = EBIT - Interest expense - Tax

1 = 1.5 - $0 - Tax (ignoring the effect of financing)

Tax = $1.5 - $1

Tax = $0.5 million