Let's consider two companies, DEBT Corporation and NON-DEBT Corporation. Both companies are expected to have earnings before
Question:
Let's consider two companies, DEBT Corporation and NON-DEBT Corporation. Both companies are expected to have earnings before interest and taxes of $100,000 over the next year. Additionally, DEBT Corporation is expected to incur interest expense of $35,000 as a result of its indebtedness, while NON-DEBT Corporation will not incur any interest expense because it does not use debt financing. However, NO DEBT will have to pay shareholders $35,000 in dividends. Both firms are in the line of paying 21 percent contributions. Show your calculations.
a. Calculate the after-tax profits for both firms.
b.Which of the firms has the highest income after paying taxes?
c.What is the savings in payment of contributions by the company DEUDA?
d. What is the interest expense on DEBT after taxes?
e. How is the difference explained?
Expert Answer:
Lets calculate the aftertax profits for both DEBT Corporation and NONDEBT Corporation compare their income after paying taxes find the savings in paym... View the full answer
