Onyx expects to have an EBIT of $240,000 with a standard deviation of $110,000. The distribution of operating income is approximately normal. If Onyx has interest expenses of $50,000, what is the probability that it will have an operating income that is below $0? (Problem requires a normal distribution table.)
A) 4.27%
B) 1.46%
C) 0.02%
D) 2.4%

Question

Quizplus · Accepted Answer

To find the probability that Onyx will have an operating income below $0, we first calculate the EBIT less the interest expenses to find the net income before taxes. EBIT is $240,000, and interest expenses are $50,000, so the net income before taxes is $240,000 - $50,000 = $190,000. We are looking for the probability that the operating income is below $0, which means we are interested in the probability that the net income before taxes is less than -$50,000 (since we've already subtracted the interest expenses). To find this probability, we need to calculate the Z-score, which is given by the formula: Z = (X - μ) / σ, where X is the value we are interested in (in this case, -$50,000), μ is the mean (in this case, $190,000), and σ is the standard deviation ($110,000).Z = (-$50,000 - $190,000) / $110,000 = -$240,000 / $110,000 = -2.18.Looking up the Z-score of -2.18 in a normal distribution table gives us a probability of approximately 1.46%, which corresponds to option B.

Onyx Expects to Have an EBIT of $240,000 with a Standard