Rao Construction recently reported $28.00 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 25%. What was Rao's operating income, or EBIT, in millions? a. $15.40 Ob. $11.81 c. $12.40 d. $8.85 e. $18.40
Rao Construction recently reported $28.00 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 25%. What was Rao's operating income, or EBIT, in millions? a. $15.40 Ob. $11.81 c. $12.40 d. $8.85 e. $18.40
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![### Sample Finance Problem – Calculation of Operating Income
**Problem Statement:**
Rao Construction recently reported $28.00 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 25%. What was Rao's operating income, or EBIT, in millions?
**Options:**
a. $15.40
b. $11.81
c. $12.40
d. $8.85
e. $18.40
---
**Solution Explanation:**
The operating income, or Earnings Before Interest and Taxes (EBIT), is calculated by subtracting operating costs and depreciation from sales. Here's the step-by-step calculation:
1. **Sales:** $28.00 million
2. **Operating Costs (other than depreciation):** $12.60 million
3. **Depreciation:** $3.00 million
**Formula for Operating Income:**
\[ \text{Operating Income (EBIT)} = \text{Sales} - \text{Operating Costs} - \text{Depreciation} \]
**Calculation:**
\[ \text{EBIT} = \$28.00 \, \text{million} - \$12.60 \, \text{million} - \$3.00 \, \text{million} \]
\[ \text{EBIT} = \$12.40 \, \text{million} \]
Thus, the operating income (EBIT) for Rao Construction is **$12.40 million**.
Therefore, the correct answer is:
**c. $12.40**
For educational purposes, let's illustrate the calculation visually in a step-by-step manner:
### Step-by-Step Visual Explanation:
1. **Sales Revenue:**
- Represented by a full bar of $28.00 million.
2. **Subtract Operating Costs:**
- A segment of $12.60 million is removed from the $28.00 million bar.
3. **Subtract Depreciation:**
- An additional segment of $3.00 million is removed from the remaining amount.
4. **Resulting in Operating Income (EBIT):**
- The final segment left represents $12.40 million.
This visually breaks down how the sales revenue is reduced by operating](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F13ffb487-410c-4808-947c-8212d0ee5563%2Fd1df746f-ee66-44bc-9851-d6442133e52a%2F7jlmobq_processed.png&w=3840&q=75)
Transcribed Image Text:### Sample Finance Problem – Calculation of Operating Income
**Problem Statement:**
Rao Construction recently reported $28.00 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 25%. What was Rao's operating income, or EBIT, in millions?
**Options:**
a. $15.40
b. $11.81
c. $12.40
d. $8.85
e. $18.40
---
**Solution Explanation:**
The operating income, or Earnings Before Interest and Taxes (EBIT), is calculated by subtracting operating costs and depreciation from sales. Here's the step-by-step calculation:
1. **Sales:** $28.00 million
2. **Operating Costs (other than depreciation):** $12.60 million
3. **Depreciation:** $3.00 million
**Formula for Operating Income:**
\[ \text{Operating Income (EBIT)} = \text{Sales} - \text{Operating Costs} - \text{Depreciation} \]
**Calculation:**
\[ \text{EBIT} = \$28.00 \, \text{million} - \$12.60 \, \text{million} - \$3.00 \, \text{million} \]
\[ \text{EBIT} = \$12.40 \, \text{million} \]
Thus, the operating income (EBIT) for Rao Construction is **$12.40 million**.
Therefore, the correct answer is:
**c. $12.40**
For educational purposes, let's illustrate the calculation visually in a step-by-step manner:
### Step-by-Step Visual Explanation:
1. **Sales Revenue:**
- Represented by a full bar of $28.00 million.
2. **Subtract Operating Costs:**
- A segment of $12.60 million is removed from the $28.00 million bar.
3. **Subtract Depreciation:**
- An additional segment of $3.00 million is removed from the remaining amount.
4. **Resulting in Operating Income (EBIT):**
- The final segment left represents $12.40 million.
This visually breaks down how the sales revenue is reduced by operating
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