Little Books, Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its...

Question:

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?

Earnings Before Interest and Taxes:

The earnings before interest and taxes represent the operating income before considering the nonoperating expenses like interest and taxes. It is the income after considering the noncash expenses like depreciation and other operating expenses. From EBIT, interest expense is reduced to determine the taxable income and taxes are reduced from taxable income to determine the net income.

Answer and Explanation:


Answer:

Little Books, Inc's interest expense is $1,000,000.

Explanation:

The first step is to determine the earnings before taxes (EBT):

  • EBT = Net income / (1 - Tax rate)
  • EBT = $3,000,000 / (1 - 0.40)
  • EBT = $5,000,000

The second step is to determine the interest expense:

  • Interest expense = EBIT - EBT
  • Interest expense = $6,000,000 - $5,000,000
  • Interest expense = $1,000,000

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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