Question

Molteni Motors Inc. recently reported $3.75 million of net income. Its EBIT was $7.25 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $3.75 million net income by 1 − T = 0.6 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

Net income = $3.75 million

Net income = Earnings before tax - Tax expense

Net income = Earnings before tax * (1- tax rate)

Net income = Earnings before tax * (1-40%)

Earnings before tax = Net income / (1-40%)

Earnings before tax = $3075000 / 60%

Earnings before tax = $5125000

Now, the proforma for income statement is:

Earnings before interest and tax (EBIT)

Less: Interest expense

Earnings before tax

Less: Tax expense

Net income

We will now calculate the interest expense, which is:

EBIT - Interest expense = Earnings before tax

$7025000 - Interest expense = $5125000

Interest expense = $7025000 - $5125000

Interest expense = $1900000