Question

# Holly's Art Galleries recently reported \$15.8 million of net income. Its EBIT was \$27 million, and...

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 : 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

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