Q: Could you please explain the change in EBITDA on Slide 65? Where are those numbers coming from? I don’t see them in the financial statements provided.
A: Operating Expenses and EBITDA come from the Total Coverage, Inc. income statement. EBITDA% is computed by dividing EBITDA by Sales, which we get from the income statement. And we get Net Profit before Tax from the income statement as well.
The Maximum Personal Income Tax Rate is a combination of the maximum federal personal income tax rate and maximum California personal income tax rate in 2018 and 2017 – 35.00% and 9.30% in 2018 and 40.00% and 9.30% in 2017. These two amounts are listed in the EBITDA Adjustment Worksheet attached to the Exercise.
The Implicit Income Tax Obligation is the result of multiplying Net Profit before Tax by the Maximum Personal Income Tax Rate. It is the maximum amount Larry Crevin, the sole owner of Total Coverage, Inc. would be obligated to pay if all this taxable income were taxed at the Maximum Personal Income Tax Rate. It is the maximum amount of distributions he would use to satisfy the income tax obligation on taxable company income pass through to him for payment.
Distributions and Withdrawals and Loans to Shareholders come from the Total Coverage, Inc. financial statements.
The Amount in Excess of Personal Tax Obligation is the sum of Distributions and Withdrawals and Loans to Shareholders minus the Implicit Income Tax Obligation. This amount is, in effect, additional compensation for Larry Crevin.
Adjusted Operating Expenses are Operating Expenses from the income statement adjusted upward by the Amount in Excess of Personal Tax Obligation.
Adjusted EBITDA is Sales from the income statement minus the Amount of Excess Personal Tax Obligation or, in effect, minus additional owner compensation.
Adjusted EBITDA% is Adjusted EBITDA divided by Sales from the income statement.
Course overview: Financial Statement Review and Ratio Analysis