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Byron Books Inc. recently reported $13 million of net income. Its EBIT was $20.8 million, and its...

Question:

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.

Explanation:

As per the data:

  • Net Income = $13,000,000
  • EBIT = $20,800,000
  • Tax rate = 35%

Computation:

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

Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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