1. Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40 percent. What was its interest expense? (Hint: write out the headings for an income statement and then fill in the known values. Then divide $3 million of 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. Use this same procedure to work some of the other problems.)
Net Cash Flow
2. Kendall Corners, Inc. recently reported net income of $3.1 million and depreciation of $500,000. What was its net cash flow? Assume it had no amortization expense.
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(EBIT – Interest) – (EBIT – Interest) ( Tax Rate) = Net Income (Eq. I)
This says EBIT – Interest – Taxes = Net Income because Taxes are after interest:
Taxes = (EBIT – Interest) (Tax Rate)...