Sinclair, Inc. is a levered firm with assets valued at $10,000 and has debt issued at 10% interest. Sinclair pays tax at the rate of 34%.
The firm faces EBIT scenarios of recession and boom. {Note: EBIT = earnings before interest and tax, $ Interest = dollar amount of interest owed on the debt, NIBT = net income before tax, NI = net income, EPS = earnings per share}.
Assume that firms with zero or negative NIBT pay zero taxes.
|
EBIT |
$ Interest |
NIBT |
TAXES |
NI |
EPS |
| Boom |
$900 |
|
|
|
|
$1.32 |
| Recession |
$200 |
|
-$550 |
|
|
|
What amount comes closest to the amount of interest that Sinclair must pay in the BOOM scenario?
a. $60
b. $99
c. $66
d. $90
e. $51