Ebit related

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pnayal (Querist)
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20 December 2012 i have following scenario:

A firm has shares of rs 75/- lac,
variable cost of rs 42 /- lac and
fixed cost of 6 lac.
Debt is rs 45 lac @ 9 %.
Equity of 55 lac.

At what level the EBIT of the firm will be equal to zero.

urgent pls reply..

Preety Chawda

Preety Chawda (Expert)
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21 December 2012 Earnings Before Interest and Taxes. A measure of a company's earning power from ongoing operations, equal to earnings before deduction of interest payments and income taxes. EBIT excludes income and expenditure from unusual, non-recurring or discontinued activities. In the case of a company with minimal depreciation and amortization activities, EBIT is watched closely by creditors, since it represents the amount of cash that such a company will be able to use to pay off creditors. also called operating profit.
Break even EBIT = VC+FC = 42+6 = 48
Therefore at Income level of Rs 48/- EBIT of the firm will be equal to zero

Preety Chawda

Preety Chawda (Expert)
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21 December 2012 The above solution is correct provided Interst cost of Rs. 4,05,000/- is not included in Fixed cost.

Alternatevly if FC includes Rs. 4.05 lacs of Interest on Debt than it must be reduced from FC

And alternative EBIT will be, Break even EBIT = VC+FC = 42+6-4.05 = 43.95 lacs

Therefore at Income of Rs. 43.95 the EBIT will be 0

Preety Chawda

Preety Chawda (Expert)
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