Question

Molteni Motors Inc. recently reported $3.25 million of net income. Its EBIT was $7 million, and its tax rate was 35%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $3.25 million net income by 1 − T = 0.65 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense.

Answer 1

Answer:

$1,583,333.33

Explanation:

Given:

Net Income = $3.25 million = $3,250,000

EBIT = $7 million = $7,000,000

Tax rate, T = 35%

Now,

the pretax income = $\frac{\textup{Net income}}{\textup{(1 - T)}}$

on substituting the respective values, we get

the pretax income = $\frac{\textup{3,250,000}}{\textup{(1 - 0.35)}}$

or

the pretax income = $5,416,666.67

Now,

The interest expense = EBIT - pretax income

or

The interest expense = $7,000,000 - $5,416,666.67 = $1,583,333.33