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13 March, 23:32

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

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  1. 14 March, 00:00
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    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
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