Winston industries had sales of $843,800 and costs of $609,900. the firm paid $38,200 in interest and $18,000 in dividends. it also increased retained earnings by $62,138 for the year. the depreciation was $76,400. what is the average tax rate? a. 32.83 percentb. 33.33 percentc. 38.17 percentd. 43.39 percente. 48.87 percent

(A) 32.83%

Explanation:

        EBITDA= Sales - Costs

     =  $ 843,800 - $ 609,900

     =  $ 233,900

     2. We get EBITDA of $ 233,900. From this we have to deduct             depreciation first and then interest amount, both of which are given in the problem.

EBITDA - Depreciation= $ 233,900 - $ 76,400

= $ 157,500

We get Earning before Interest and Tax (EBIT) of $ 157,500.

From the EBIT, we will deduct interest amount of $ 38,200.

Hence, Earning / Profit before Tax will be EBIT - Interest.

Profit before Tax = $ 157,500 - $ 38,200

= $ 119,300

      3. Let us assume tax payment of $ X. We have found Profit Before Tax (PBT) of $ 119,300. From PBT and tax payment, we can find Profit After Tax (PAT) as follows -

PAT= PBT - Tax paid

= $ (119,300 - X )

      4. We are given dividends of $ 18,000. Dividends for the equity shareholders are payable on PAT. If we minus dividends from PAT, we will get Retained Earnings.

Thus, Retained Earnings = PAT - Dividends

= $ 119,300 - $ X - $ 18,000

= $ 101,300 - X

      5. Retained Earnings are given in the problem as $ 62,138.

Hence,

$ 101,300 - X = $ 62,138

X = $ 101,300 - $ 62,138

X= $ 39,162

      6. Thus, taxes of $ 39,162 are paid. These taxes are paid on Profit Before Tax (PBT). Recall that PBT was $ 119,300 as calculated in Step 2.

Hence, tax paid will be -

Tax % ( let's say T%) * PBT = Tax Amount

T% = Tax Amount / PBT

     = $ 39,162 i.e. X / $ 119,300

     = 0.32826

     = 32.83 % (approx.)

32.82%

Explanation:

The computation of the average tax rate is shown below:

Sales      $843,800

Less:

Cost       -$609,900

Interest  -$38,200

Depreciation - $76,400

Profit before tax $119,300

Less: dividend      -$18,000

Less: Increased in retained earnings -$62,138

Total tax $39,162

And, the profit before tax is $119,300

So, the average tax rate would be

= (Total tax ÷ Profit before tax) × 100

= ($39,162 ÷ $119,300) × 100

= 32.82%

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