Problem 3-2 Income Statement Little Books Inc. recently reported $15 million of

Question

Problem 3-2
Income Statement

Little Books Inc. recently reported $15 million of net income. Its EBIT was $28.5 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 $15 million net income by (1 - T) = 0.6 to find the pretax income. The difference between EBIT and taxable income must be the interest expense. Use this same procedure to complete similar problems.] Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest dollar, if necessary.

Answer: $_____________

Please show calculation. Thanks!

Explanation / Answer

The book is correct.

$15,000,000 / 0.6 = $25000000(Earnings Before Tax)

That is the income before tax.

SinceEBITwas $28.5million the Interest is the difference between $28.5 EBIT and the $25million EBT.

So the interest amount = $3.5 million

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