# EBIT Calculation  ## How to Calculate EBIT?

is the measure of a company’s profitability. EBIT calculation is done by deducting the cost of goods sold and operating expenses.

For eg:
Source: EBIT Calculation (wallstreetmojo.com)

### EBIT Formula

#### Formula #1 – Income Statement Formula

Earnings Before Interest and Tax  = Revenue – – Operating Expenses

#### Formula #2  – Using Contribution Margin

Sales – Variable Cost – Fixed Cost = EBIT

• Sales – Variable Cost is also known

### Step by Step Examples of EBIT Calculation

#### Example #1

We have a company named ABC Inc., having revenue of \$4,000, COGS of \$1,500, and of \$200.

Therefore, the EBIT is \$2,300.

#### Example #2

We have the following data –

• Sales \$5 million
• Variable Cost- 12% of Sales,
• Fixed cost – \$200,000

Let’s do the calculation of EBIT (Earnings Before Interest and Taxes).

#### Example #3

Let us assume that there is a Project is of 5 Years:

• Sales \$5 million and 7% increment Per Annum.,
• Contribution Margin is – 70%, 75%, 77%, 80% and 65% of Sales each year respectively,
• Fixed Cost is \$125,000.

Calculate EBIT.

Solution:

#### Example #4

We have the following data

• – 1.4 Times
• Capital (Equity and Debt) –  Equity Shares of \$100 each, 34000
•  10% Debentures of \$10 each – total 8 million number
• Tax Rate-  35%. Calculate EBIT

Solution:

Calculation of Interest and Profit:

Financial Leverage = EBIT/EBT

Interest on Borrowings: \$80 million * 10% = \$8million

Therefore, calculation of EBIT is as follows,

Financial Leverage= EBIT/EBT

• 1.4 = EBIT/ (EBIT-Interest)
• 1.4 (EBIT-Interest) = EBIT
• 1.4 EBIT- (\$8 milllion *1.4) = EBIT
• 1.4 EBIT- EBIT= \$11.2 million
• 0.4 EBIT= \$11.2 million
• EBIT= \$11.2 million/ 0.4

EBIT= \$28 million.

#### Example #5

ABC Limited has to choose the alternative at which EBIT, will be the same for the given below alternatives:

• Equity of \$ 60 million of \$ 10 each and 12% debenture of \$ 40 million Or
• Equity of \$ 40 million of \$ 10 each, 14% preference share capital of \$ 20 million, and 12% debenture of Rs 40 million.

And Tax= 35%. Calculate EBIT, at which EPS will be indifferent between alternatives.

Solution:

Alternative 1:

EPS(Alt-1) = (EBIT-Interest) (1-tax rate) / No. of Equity Shares

• = (EBIT- 12%* \$40 million) (1-0.35)/6 million
• = (EBIT- \$4.8 million)( 0.65)/6 million

Alternative 2:

EPS(Alt-2) = (EBIT-Interest) (1-tax rate)- (0.14* \$20 million) / No. of Equity Shares

• = (EBIT- 12%* \$40 million) (1-0.35) -(\$2.8 million)/4.0 million
• = (EBIT- \$4.8 million) (0.65) -(\$2.8 million)/4.0 million

Let’s compare EPS at alternative 1 with alternative 2

• EPS(Alt-1) = EPS(Alt-2)
• (EBIT- \$4.8 million)( 0.65)/6 million = (EBIT- \$4.8 million) (0.65) -(\$2.8 million)/4.0 million

Solving this equation for EBIT, we get

EBIT= \$17.72308 million

#### Example #6

We have the following data

• Market Value of the Firm: \$ 25 million
• Cost of Equity(Ke)= 21%
• 15% Debt value = \$ 5.0 million at market value
• Tax Rate = 30%.

Calculate EBIT.

Solution:

For the calculation of EBIT, we will first calculate the net income as follows,

Value of the Firm= Market value of Equity + Market value of Debt

• \$25 million = Net Income/ Ke + \$ 5.0 million
• Net Income= (\$ 25 million -\$ 5.0 million) * 21%
• Net Income= \$ 4.2 million

Therefore, the calculation of EBIT is as follows,

EBIT = Net income attributable to shareholders/ (1- Tax Rate)

• = \$4.2 million/ (1-0.3)
• = \$ 4.2 million/0.7
• = \$ 6.0 million

#### Example #7

We have the following data

• Production level of Company – 10000 units
• Contribution per unit = \$30 per unit
• Operating Leverage = 6
• Combined Leverage = 24
• Tax Rate = 30%.

Calculate EBIT

Solution:

Financial Leverage

• 24 = 6*Financial Leverage
• Financial Leverage = 4

Total Contribution= \$30 *10000 units= \$300,000

Therefore, the calculation of EBIT is as follows,

Operating Leverage = Contribution/ EBIT

• 6  = \$300,000 / EBIT
• EBIT = \$300,000 / 6
• EBIT = \$50,000

#### Example #8

We are provided with the following dataset

• Operating Leverage- 14
• Combined Leverage – 28
• Fixed Cost – (Excluding Interest) – \$2.04 million
• Sales- \$ 30 million
• 12% Debentures- \$21.25 million
• Tax Rate = 30%.

Calculate EBIT

Solution:

Financial Leverage

Combined Leverage = Operating Leverage * Financial Leverage

• 28 = 14* Financial Leverage
• Financial Leverage= 2

Contribution

Operating Leverage = Contribution /EBIT

• 14= Contribution/ Contribution-
• 14= Contribution/ Contribution- \$2.04 million
• 14 Contribution – \$28.56 million = Contribution
• Contribution= \$ 28.56 million/13
• Contribution= 2.196923 million

Therefore, the calculation of EBIT is as follows,

This has been a guide to EBIT Calculation. This is a step by step guide to learn how to calculate EBIT with the help of a simple to advanced examples. You may learn more about accounting from the following articles –