Question

Peterson Manufacturing recently reported EBITDA of $18.75 million and $4.5 million of net income. It has $5 million of interest expense and its corporate tax rate is 40%. What was its depreciation and amortization expense (in millions of dollars)

Answer 1

Answer:

Peterson Manufacturing

Its depreciation and amortization expense (in millions of dollars) was:

= $6.25 million

Explanation:

a) Data and Calculations:

EBITDA =                                                      $18.75 million

Depreciation and amortization expense = $6.25 million

Earnings before Interest =                         $12.50 million

Interest expense =                                       $5.00 million

Earnings before taxes =                               $7.50 million

Corporate taxes (40%) =                              $3.00 million

Net Income =                                               $4.50 million

Earnings before taxes = Net income/1-tax rate

= $4.5 million/60% = $7.5 million

Corporate taxes = 40% of $7.5 million = $3.0 million

Earnings before interest = Interest expense plus earnings before taxes (earnings after interest)

= $5 million + $7.5 million = $12.5 million

Therefore, Depreciation and amortization expense = EBITDA - Earnings before Interest

= $18.75 million - $12.5 million

= $6.25 million

b) EBITDA = Earnings before Interest, Taxes, and Depreciation and Amortization.