Little Books Inc. recently reported $3.75 million of net income. Its EBIT was $7

Question

Little Books Inc. recently reported $3.75 million of net income. Its EBIT was $7.25 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 $3.75 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 whole dollar and enter your answer as a dollar amount.

Explanation / Answer

he book is correct. $3,000,000 / 0.6 = $5,000,000 (Earnings Before Tax) That is the income before tax. Since EBIT was $6,000,000, the Interest is the difference between $6,000,000 EBIT and the $5,000,000 EBT. So the interest amount = $1,000,000

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