Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 mi

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

Explanation / Answer

The easy way to get the answer is - If tax rate is 40% , Net income will be 60% If net income is 3 million (60%), Income before Income tax = (Net Income / 60) x 100 = 5 million. EBIT given is 6 million and income before income tax is 5 million. So, the interest expense = EBIT - Inocme before income tax = 6 million - 5 million = 1 million.

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