I did a Schweser Mock and they calculate NOPAT as EBIT * (1-t)
Which is kind of like saying your EBIT is your taxable income. How is that helpful at all because it is assuming more tax than would actually be paid because you haven’t accounted for interest yet.
EBITDA is helpful because you can say you are making it more comparable to other companies with various taxes, asset structure through depreciation, and capital structure.
Calculating NOPAT as EBIT * (1-t) just seems like you are inflating how much taxes will be paid. Is the point to just be an approximation?
NOPAT stands for net operating profit after tax. The value is supposed to isolate the profit driven by operating items , after the tax impacts they have contributed, have been considered.
Think about the formula for economic profit, NOPAT - $WACC. The cost of debt and equity are both captured within the second term.
Thanks, well let me give an example given this income statement:
tax rate of 30%
Rev 100
COGS 50
GP 50
opex/dep 25
EBIT 25
Int exp 5
EBT 20
tax 6
NI 14
Now looking at EBIT *(1-t)
25*.7 = $17.50
which means your tax was 25 *.3 = 7.5
Which means that you are allocating to tax 1.5 more than what happened in the full income statement (6). So I just see it as inflating tax. Does that make sense? I realize I just should think about it that way, but it was a problem for me when I tried to figure it out on my own on a mock instead of knowing its just EBIT*(1-t).
It’s perfectly accurate to say that your tax related to operating items was 7.5 and then your tax related to interest was - 1.5 and therefore total tax is 6, so I don’t see any inflating of tax.
However, I get you’re saying it’s just a clash with your personal thought process.
ohhhhh I get it now…lol. Thanks your last post made it clear to me.
You too! But don’t talk like this is the last time we’re going to reply to each other’s posts lol…still some time to get some learning in and I value your comments.
