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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

INCOME STATEMENT Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an income statement and fill in the known values. Then divide $3 million of net income by (1 − T) = 0 6 to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.]

Summary Introduction

To determine: The interest expense of Company L.

Income Statement: A part of financial statements that lists the income and expenses of business for an accounting year is called income statement. It is prepared at the end of accounting period to know the profitability of the business.

Explanation

Solution:

Partial income statement of Company L:

L Company
Partial Income Statement
Particulars

Amount

($)

Earnings Before Interest and Taxes (EBIT) 6,000,000
Interest Expense (1,000,000)
Taxable Income 5,000,000
Income Tax (40%) (2,000,000)
Net Income 3,000,000

Working note:

Taxable income:

Taxable Income=Net Income(1Tax Rate)

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