Molteni Motors Inc. recently reported $3 million of net income. Its EBIT was $6.

Question

Molteni Motors Inc. recently reported $3 million of net income. Its EBIT was $6.5 million, and its tax rate was 40%. What was its interest expense? Round your answer to the nearest dollar. (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $3 million net income by 1 - T = 0.6 to find the pretax income. The difference between EBIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.) Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

Explanation / Answer

Net income = 3,000,000

Tax rate = 40%

Therefore,

Earnings before tax = Net income / (1-Tax rate)

= $3,000,000 / (1 - 0.60)

= $5,000,000

Earnings before tax = $5,000,000

And,

Earnings before interest and tax = $6,500,000

Therefore,

Interest expense = Earnings before interest and tax - Eanrings before tax

= $6,500,000 - $5,000,000

= $1,500,000

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