7. XYZ has operating earnings of $40 million and total assets of $280 million. The company's...

 

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7. XYZ has operating earnings of $40 million and total assets of $280 million. The company's management is considering three alternative capital structures. The debt requires an annual payment of 12% and the tax rate is 40%. a. The three capital structures are given the table below. Compute the values in the table: Capital Structure $ in millions A B C Debt $0.0 $ 10.0 $20.0 Operating earnings - Interest expense Taxable income - Taxes Earnings available to owners !! b. Explain how financing its activities using capital structure B reduces the company's tax liability. c. Explain how financing its activities using capital structure C reduces the company's tax liability. d. Based on the calculations above, explain how the total income to the sup- pliers of capital increases from the use of debt. 7. XYZ has operating earnings of $40 million and total assets of $280 million. The company's management is considering three alternative capital structures. The debt requires an annual payment of 12% and the tax rate is 40%. a. The three capital structures are given the table below. Compute the values in the table: Capital Structure $ in millions A B C Debt $0.0 $ 10.0 $20.0 Operating earnings - Interest expense Taxable income - Taxes Earnings available to owners !! b. Explain how financing its activities using capital structure B reduces the company's tax liability. c. Explain how financing its activities using capital structure C reduces the company's tax liability. d. Based on the calculations above, explain how the total income to the sup- pliers of capital increases from the use of debt.