Question

eBook Problem Walk-Through Byron Books Inc. recently reported $6 million of net income. Its EBIT was $10.8 million, and its tax rate was 25%. What was its interest expense? (Hint: Write out the headings for an income statement, and then fill in the known values. Then divide $6 million of net income by (1 - 1) = 0.75 to find the pretax income. The difference between EBIT and taxable income must be 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. Do not round intermediate calculations.

Answer 1

Solution Net Income EBIT $6 million or $6,000,000 $10.8 million or $10,800,000 Tax Rate 25% or 0.25 Calculate Interest Expense First of all, we will calculate taxable income. Taxable Income = Net Income - Tax Rate = $ 6,000,000 1 -0.25 $ 6,000,000 0.75 = $8,000,000 Interest axpense > Taxable Income – EBIT = $10,800,000 - $8,000,000 = $2,800,000 This is the bottom up approach of calculating interest expense that includes calculating taxable income first by dividing net income

with Cl- Tax Rate). And the between EBIT is and taxable interest expense, difference income is the ЕВТ $ 10,800,000 Less: Interest (2,800,000) Earning Before Tax 8,000,000 Orº Taxable Income Less: Tax @ 25% 2,000,000) Net Income 6,000,000