Byron Books Inc. recently reported $6 million of net income. Its EBIT was $8.2 million, and...

Byron Books Inc. recently reported $6 million of net income. Its EBIT was $8.2 million, and its tax rate was 25%. 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 of net income by (1 - T) = 0.75 to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.) Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest dollar, if necessary. Do not round intermediate calculations.

Solutions

Expert Solution

Income statement of Byron Books Inc.
	$
EBIT	8200000
Net Interest Expense	(200000)
EBT(Taxable Income/Pre tax income)	8000000
Tax(25%)	(2000000)
Net Income	6000000

Here we have calculated tax as

We know that net income is 60,00,000(given in question)

tax is 25%, let's take x as EBT(Taxable Income)

So we can identify that X-(X*25/100)= 60,00,000

Means EBT- (25% of tax of EBT) gives us net income

Rearranging the formula

X-(25X/100)=6000000

(100x-25x)/100=60,00,000

75X= 60,00,000*100

X=60,00,0000/75= 80,00,000

Therefore we can put taxable income(EBT) as 80,00,000

Tax will be 25% of 80,00,000 = 20,00,000

Interest Expense= EBIT-EBT

= 8200000-8000000= 2,00,000

jeff jeffy answered 1 year ago

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