Molteni Motors Inc. recently reported $3.5 million of net income. Its EBIT was $7 million, and its tax rate was 30%. What was its interest expense?

Answer 1

EBIT is earnings before interest and taxes. Subtracting interest expense and tax expense from EBIT will result in Net Income. EBIT - Interest expense = Earnings subject to tax. Earnings subject to tax * (1- tax rate) = after tax earnings.

EBIT - Interest Expense - Tax expense = Net Income

(EBIT - Interest Expense) x (1- tax rate) = Net Income

0.70 ($7,000,000 - X) = $3,500,000

$4,900,000 - 0.70X = $3,500,000

0.70X = 1,400,000

X = $2,000,000 = Interest Expense

Confirmation: $7,000,000 EBIT - $2,000,000 Interest Expense = $5,000,000 x .70 = $3,500,000 Net Income