Question #2
Reading: Reading 13 Integration of Financial Statement Analysis Techniques
PDF File: Reading 13 Integration of Financial Statement Analysis Techniques.pdf
Page: 1
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
A firm has reported net income of $136 million, but the notes to financial statements includes a statement that the results "include a $27 million charge for non-insured earthquake damage" and a "gain on the sale of certain assets during restructuring of $16 million." If we assume that both of these items are given on a pre-tax basis and the effective tax rate is 36%, what would be the "normal income"?
Answer Choices:
A. $143.04 million
B. $147.00 million
C. $94.08 million
Explanation
To normalize earnings you would increase it by the non-recurring charge of $27 million
and decrease it by the non-recurring gain, both tax adjusted.
$136 + (27 - 16)(1 - 0.36) = $143.04.