Byron Books Inc. recently reported $13 million of net income. Its EBIT was $20.8 million, and its tax rate was 35%. What was its interest expense?
Earnings Before Interest and Taxes:
Earnings before interest and taxes are computed by reducing the operating and noncash expenses from the gross profit. It is also called as the income before deducting the non-operating expenses like interest expense and taxes. To derive the net income, we need to reduce the interest and taxes from the EBIT.
Answer and Explanation:
Answer: The interest expense of Byron Books Inc. is $800,000.
As per the data:
- Net Income = $13,000,000
- EBIT = $20,800,000
- Tax rate = 35%
The first step is to determine the earnings before taxes (EBT):
- Net Income = Earnings before taxes * (1 - Tax rate)
- Earnings before taxes = $13,000,000 / (1 - 0.35)
- Earnings before taxes = $20,000,000
The second step is to determine the interest expense:
- EBIT = Earnings before taxes + Interest expense
- Interest expense = $20,800,000 - $20,000,000
- Interest expense = $800,000
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 18