Question

Holly's Art Galleries recently reported $15.8 million of net income. Its EBIT was $27 million, and its federal tax rate was 21% (ignore any possible state corporate taxes). What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $15.8 million net income by 1 − T = 0.79 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense.) Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

Answer 1

Answer : Interets Expense is 7 million.

Calculation of Interest Expenses

Given

	Working	Amount
EBIT	Given	27 million
Less : Interest Expense	Balancing Figure	(7 million)
Pre Tax Income	Net Income / 0.79	20 million
Less : Taxes	Pre tax Income * 0.21	(4.2 million)
Net Income	Given	15.8 million

Working Note:

Net Income	Given	15.8 million
Add: Taxes	Pre Tax Income * 0.21	4.2 million
Pre Tax Income	Net Income / 0.79	20 million
Add : interest Expenses	Balancing Figure	7 million
EBIT	Given	27 million