Stumped by 1st Round Question
Two companies are identical, except company A has tax rate of 20% while company B has tax rate of 35%. Which has a higher EBITDA?
I said that they had equivalent EBITDA, because EBITDA does not include tax, and that all else was the same. Which is wrong. Thoughts?
Thanks in advance for the help!
If NI is the same, company B would have a higher EBITDA
How so?
Higher tax rate = higher tax bracket = higher top line
It's a poorly worded question (either by you here or the interviewer during the interview). The only way you're wrong is if they're saying the two companies are "identical" in terms of their net income after tax. Then, of course, company B has higher EBITDA.
Yeah I agree, this question could've been better worded.
What's identical? Net income or up until EBT? Big difference.
As GreenspanAndHam mentioned, If the tax rate is higher then wouldn't it be automatically assumed that Company B has a higher EBITDA?? Correct me if I am wrong
WTF. You weren't wrong. If the companies are identical, the EBITDA is the same. A company =/= an income statement, so it stands to reason that these companies sell the same products for the same prices and bear the same costs making and marketing them. The different tax rates, obviously, affect net income, but not EBITDA.
I think it was a badly worded trick question that doesn't hold up under scrutiny.
OP should email this thread to the interviewer.
"pls see link thx"
This question is nonsensical as worded in the op. How can two companies be exactly the same save for their tax rate? For them to end up with the same net income, one of them must have more deductions from pre-tax income, no?
Two identical companies selling same goods with same income & expenses could be located in different countries could be subject to different tax rates.
Just shows the shitshow that is interviewing. I had an interviewer once ask me about the most efficient way to cross a river or bridge with a certain amount of items but he got the wrong number of items so the combination was simple and he insisted I was wrong. he didn't realize his mistake in wording the question even after I asked clarifying questions.
This sounds like the sixth circle of hell
If only difference is tax rate, then A and B have same EBITDA and A has higher NOPAT. You're not wrong. The person interviewing you sucks.
I sifted through the response, and didn't see a response. Though it may have already been addressed.
You have to remember that EBITDA is EBIT, or Operating Income, plus Depreciation & Amortization. There's a depreciation tax shield, which is added back to EBIT, given that it is a non-cash expense. So if you charge a higher tax rate, this implies a larger depreciation tax shield. Remember that Depreciation appears on both the IS, under OpEx, and CFS, under cash flows from operations.
Hope that makes sense. Let me know if you have any other questions.
"Companies are identical in every way"
True - my response is how I would've addressed the question, but doesn't seem like I would've been right. Did some research, and, you're right, identical companies have identical EBITDA, regardless of capital structure/tax.
I think we can agree that this was a badly-worded question. If this were on a final exam at any university, students would complain, the professor would be overruled by his colleagues, and the question would be thrown out for all the reasons above.
Assuming you're not misrepresenting the question, this is a prime example of a person asking a brain-teaser they don't understand themselves. I see this all the time in consultancies where everyone imagines they're clever, so they guide case interviews less well than they might imagine. There is a lot of observer bias in interviews. In this case, the interviewer did a poor job articulating what they meant, you were subsequently confused, got the question 'wrong' and thereafter, the interviewer probably assumed you didn't know what you were talking about. Maybe it won't matter, and you'll get the job anyway. Alternatively, you can take the chance now to follow up with the interviewer to explain the answers provided to you above. Just be careful in your wording to make sure the interviewer doesn't feel like an idiot.
Right on. When the interviewer is wrong it's really a no-win situation for the candidate--either the candidate looks like they don't know what they are talking about or the interviewer is made to feel dumb and hence is less likely to move forward the candidate.
Wait until you have to interview with recruiters for a more senior role. I'm not a junior any longer, and I still have to deal with nonsense screening questions like, "What's your greatest weakness?" At this point, it seems my greatest weakness is an inability to stop myself from explaining to recruiters precisely how idiotic that question is.
Me to hypothetical recruiter:
You think I'm going to bare my soul to you? Where do you even get off imaging you're qualified to determine if I'm introspective and candid enough to move through your process? You went to the University of Armpit, and got a degree in Nonsense Studies--you're not qualified to babysit my dogs. I wouldn't trust you to change the toner in the copier. Why don't we just skip to the part where you ask me how much money I make, I tell you that it's not my job to make your pricing decision easier, and you put me in touch with your bosses so I can have a more meaningful discussion? And when they yell at you for not getting my compensation data before putting me through, why don't you point out that you're hiring for a job that requires candidates to be skilled negotiators, and only morons move first in showing their salary preferences.
Disagree. The intent of the question is clearly to confirm the interviewee understands what ebitda is. A quick clarifying question "by identical I want to confirm you mean revenue, margin profile, etc" and this should be a question that takes no more than 30 seconds start to finish.
The concept that the interviewer would mean net income is equal and therefore the companies are identical a pretty ridiculous.
Maybe an unpopular take, but it seems reasonable to me to assume that everything was identical except EBITDA. I say this because they said identical in every way, then asked the difference between one metric. Clearly that is the "plug" here so to speak, and you can equalize the tax difference using the variable they indicated is different between the two companies.
Yeah, but the way you COULD interpret it is as a trick question where they are trying to get you to distinguish between the companies when you shouldn't be.
I think that's fair, but they did say the tax rates are different which means some other factor has to be different as well, it doesn't make sense for every other metric to be identical, so given something must reconcile for the information given I think you're best assumption would be that EBITDA makes up the change since they asked which was higher - expressly indicating that they are not the same. I would say imprecise wording, sure, but not a broken question
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