Question

Molteni Motors Inc. recently reported $3.25 million of net income. Its EBIT was $6.75 million, and its tax rate was 35%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $3.25 million net income by 1 − T = 0.65 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense.) Round your answer to the nearest dollar. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000

Answer 1

Ans.	Particulars	Amount
	Earnings before interest and tax (EBIT)	$6,750,000
	Less: Interest expenses	$1,750,000
	Pre tax income	$5,000,000
	Less: Tax @ 35%	$1,750,000
	Net income	$3,250,000
	Pre tax income = Net income / (1 - Tax rate)
	$3,250,000 / (1 - 0.35)
	$3,250,000 / 0.65
	$5,000,000
	Tax expenses = Pre tax income * 35%
	$5,000,000 * 35%
	$1,750,000
	Interest expenses = EBIT - Pre tax income
	$6,750,000 - $5,000,000
	$1,750,000