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EBIT

Earnings before interest and taxes, commonly used interchangeably with operating income. EBIT reflects profitability from core operations before the effects of capital structure (interest expense) and tax rate, and it is the starting point for computing EBITDA by adding back depreciation and amortization.

Practice questions using EBIT

Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.

Fictional issuer Carrow Logistics reports EBIT of $30 million and depreciation and amortization (D&A) of $12 million for the year. What is EBITDA?

  1. A.$18 millionWrong. This subtracts D&A from EBIT instead of adding it back.
  2. B.$360 millionWrong. This multiplies the two figures instead of adding them.
  3. C.$30 millionWrong. This just restates EBIT without adding back D&A.
  4. D.$42 millionCorrect. $30M + $12M = $42 million.

Why: EBITDA = EBIT + depreciation and amortization = $30M + $12M = $42 million.

True or False: For a company with positive depreciation and amortization expense, EBITDA will always be greater than or equal to EBIT.

  1. A.TrueCorrect. EBITDA = EBIT + D&A, and D&A is never negative, so EBITDA is always at least as large as EBIT.
  2. B.FalseWrong. Since EBITDA is defined as EBIT plus a non-negative add-back, it cannot be less than EBIT.

Why: EBITDA equals EBIT plus depreciation and amortization. As long as D&A is zero or positive (which it always is), EBITDA must be greater than or equal to EBIT.

Meridian Tools reports EBIT of $45 million and interest expense of $9 million. What is its interest coverage ratio?

  1. A.0.2xWrong. This inverts the ratio (interest expense ÷ EBIT).
  2. B.$36 millionWrong. This subtracts instead of dividing, and a coverage ratio is a multiple, not a dollar figure.
  3. C.9xWrong. This does not correspond to dividing EBIT by interest expense correctly.
  4. D.5.0xCorrect. $45M ÷ $9M = 5.0x.

Why: Interest coverage ratio = EBIT ÷ interest expense = $45M ÷ $9M = 5.0x, meaning EBIT covers interest expense five times over.

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