Question

Use AstroTurf Company's income statement below to answer the following two questions. Answer these questions with a clear explanation, showing any steps or processes used to reach the answer. Explain your process as though you are teaching the concept to a student who isn't familiar with accounting.
Operating costs (excl. depreciations & amortization): $4.5m
Depreciation and amortization: $1.5m
Interest: $0.7m
Net Income: $2.8m
Tax Rate: 35%

1. Calculate AstroTurf’s EBITDA.

2. What level of sales would generate a net income of $4.2m for the following year, knowing that operating costs (excl. depreciation and amortization) will increase by 7.5%, and given a 35% tax rate.

Answer 1

1. Calculation of EBITDA

Net income (after tax)	2.80
Add;Tax (2.8*35/65)	1.51
Income before tax	4.31
Add; Interest	0.70
Add; Depreciation and amortization	1.50
EBITDA	6.51 million

2.Calculation of level of sales to generate a net income of 4.2 million

Net income (after tax)	4.2
Add;Tax (4.2*35/65)	2.26
Income before tax	6.46
Add; Interest (Not an operating cost)	0.70
Add; Depreciation and amortization	1.50
EBITDA	8.66
Add; Operating cost (4.5 m +7.5%)	4.84
Level of sales	13.50