Interest Burden

CFA Level II
#1

Sales=$2000 EBIT=$800 EBT=$8 Tax=40% Interest=$792 What’s the interest burden?

#2

EBT/EBIT = 8/800 = .01

#3

With all of that debt on this company, the burden is only 1%?

#4

Dreary Wrote: ------------------------------------------------------- > With all of that debt on this company, the burden > is only 1%? i look at it as 99% is the interest burden here (i.e. 99% of EBIT goes to interest expense). If the company has no leverage then interest burden equals 1.00 or 100%… therefore a 1% interest burden is pretty significant.

#5

But if you answer 99%, your answer is wrong.

#6

certainly the numerical answer is 1%, but conceptually i think of the burden as 99% of EBIT…

#7

Exactly, that’s why I don’t like the definition of interest burden as EBT/EBIT.

#8

i hear you loud and clear. how about the burden leaves a company with only 1% of EBIT to cover taxes and earnings?

#9

post interest burden percentage?

#10

ROE = Net Income / EBT * EBT / EBIT * EBIT / sales * sales / assets * assets / equity = tax burden * interest burden * EBIT margin * asset turnover * leverage I just wrote this out to see if I could remember it ; D