ExpertMedium1 markMultiple Choice
CPA · Question 04 · Area I: Business Analysis
TechStart Inc. reports Net Income of $500,000. The income statement includes:<br/>- Depreciation & Amortization: $120,000<br/>- Interest Expense: $80,000<br/>- Income Tax Expense: $150,000<br/>- Stock-based Compensation: $50,000<br/>- Gain on Sale of Equipment: $20,000<br/>- Unrealized Loss on Available-for-Sale Securities (OCI): $10,000<br/><br/>Calculate the Adjusted EBITDA, assuming management defines it as EBITDA adjusted for non-cash stock compensation and non-recurring gains/losses.
TechStart Inc. reports Net Income of $500,000. The income statement includes:<br/>- Depreciation & Amortization: $120,000<br/>- Interest Expense: $80,000<br/>- Income Tax Expense: $150,000<br/>- Stock-based Compensation: $50,000<br/>- Gain on Sale of Equipment: $20,000<br/>- Unrealized Loss on Available-for-Sale Securities (OCI): $10,000<br/><br/>Calculate the Adjusted EBITDA, assuming management defines it as EBITDA adjusted for non-cash stock compensation and non-recurring gains/losses.
Answer options:
A.
$850,000
B.
$900,000
C.
$880,000
D.
$890,000
How to approach this question
Start with Net Income. Calculate EBITDA (add back Interest, Taxes, Depreciation, Amortization). Then apply specific adjustments: add back non-cash expenses (Stock Comp), subtract non-recurring gains (Gain on Sale). Ignore OCI items as they are not in Net Income.
Full Answer
C.$880,000✓ Correct
Net Income: $500,000<br/>+ Interest: $80,000<br/>+ Taxes: $150,000<br/>+ D&A: $120,000<br/>= EBITDA: $850,000<br/><br/>Adjustments:<br/>+ Stock-based Comp (non-cash exp): $50,000<br/>- Gain on Sale (non-recurring income): ($20,000)<br/>= Adjusted EBITDA: $880,000.<br/><br/>The Unrealized Loss on AFS securities is in OCI, not Net Income, so no adjustment is needed.
Common mistakes
Adjusting for OCI items; adding gains instead of subtracting; forgetting to add back taxes or interest.
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