Question

Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an income statement and then fill in the known values. Then divide $3 million net income by (1 - T) = 0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this same procedure to work some of the other problems.] Round your answer to the nearest dollar, if necessary

Answer 1

$1,000,000

Step-by-step explanation:

Given:

Net income = $3 million = $3,000,000

EBIT = $6 million = $6,000,000

Tax rate, T = 40%

Now,

The pretax income =
`\frac{\textup{Net income}}{\textup{(1-T)}}`

or

The pretax income =
`\frac{3,000,000}{\textup{(1-0.40)}}`

or

The pretax income = $5,000,000

Therefore, the interest expenses = EBIT - Pretax income

or

the interest expenses = $6,000,000 - $5,000,000

or

The interest expenses = $1,000,000