Taxable Income Formula
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Question: How do you get an answer for the Managerial finance question or what is the formula and answer, please?
Little Books Inc. recently reported $3million of net income. Its EBIT was $6million, and its tax rate was 40%. What was its interest expenses? My book says [Hint: write out the headings for an income statement and fill in the known values. Then divide $3million of net income by (1-T)=0.6 to find the pretax income. The diff between EBIT and Taxable Income must be the interest expense.
Answer: The book is correct.
$3,000,000 / 0.6 = $5,000,000 (Earnings Before Tax)
That is the income before tax.
Since EBIT was $6,000,000, the Interest is the difference between $6,000,000 EBIT and the $5,000,000 EBT.
So the interest amount = $1,000,000
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