Interest expense

Question

Molteni Motors Inc. recently reported $6 million of net income. Its EBIT was $13 million and its tax rate was 40%. 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 net income by 1-T=0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.)

Answer 1

6,000,000 is your net income (the bottom line). Divide by .6 to find the taxable income which is 10,000,000. Double check your figure by multiplying by the tax rate given in the problem of .4 to arrive at 4,000,000 of tax which subtracted from 10,000,000 equals 6,000,000 of net income. So you know your tax liability.

 

The second part of the problem is to subtract taxable income of 10,000,000 from ebit of 13,000,000 to arrive at 3,000,000 of interest expense. Your double check is to plug in these figure into an income statement format to ensure the results agree with the parameters of the problem.

 

Open up your book to an example of an income statement to copy the format.