Firm A and B have identical business except that their financing is different: Firm A: EBIT =
Question:
Firm A and B have identical business except that their financing is different:
Firm A: EBIT = X = $10, D = $20
Firm B: EBIT = X = $10, D = $80
Suppose that corporate tax rate TC is 40%, cost of debt is RD is 10% for both. Please answer the following questions:
Note: If your choice is A, then type in A. Do not type (A) or anything else.
1. Which firm has a greater FCF (free cash flow)?
(A) Firm A (B) Firm B (C) Both have the same FCF (D) Hard to say
2. What is firm A's (annual) tax shield?
(A) $0 (B) $0.4 (C) $0.6 (D) $4 (E) None of the others is correct
3. What is firm B's (annual) tax shield?
(A) $0 (B) $0.8 (C) $3.2 (D) $7 (E) None of the others is correct
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary