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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 fill in the known values. Then divide $3 million of net income by to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.]

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tutorAnne

Answer: Interest expense = $1 million

Explanation:

Net income  is given as

Net Income = Pretax income x (1-Tax rate )

Therefore

Pretax income= Net income / ( 1- tax rate )

= 3/(1-0.4) = 5 million

But ,

EBIT - Interest = Pretax income

Interest  expense = EBIT - Pretax Income

= 6 million - 5 million =$ I million

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