Fly by Night Aviation (FBNA) expects to have net income next year of $24 million
ID: 1253556 • Letter: F
Question
Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and total income available to all investors (interest expense plus net income) of $27 million. FBNA’s marginal corporate tax rate is 40%.(a) FBNA’s EBIT is closest to:
(1) $43 million
(2) $40 million
(3) $45 million
(4) $60 million
(b) If FBNA increases leverage so that its interest expense rises by $1 million, then the amount its net income will change is closest to:
(1) -$400,000
(2) -$600,000
(3) $400,000
(4) $600,000
(c) If FBNA increases leverage so that its interest expense rises by $1 million, then the amount of income available to all investors will change by about:
(1) -$600,000
(2) -$400,000
(3) $600,000
(4) $400,000
Explanation / Answer
A. EBIT = Earnings before interest and taxes. 24/0.4 = 6 The correct answer is (4) B. 59*0.4 - 60*0.4 = -400000 The correct answer is (3) C. Net income will decrease by 400000. Interest expense will increase by 1 million. But the income available to all investors includes interest expense. So, the change in the income available to all investors will also be -400000 The correct answer is (2)