« previous next »

Author Question: Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to have ... (Read 418 times)

sabina

  • Hero Member
  • *****
  • Posts: 563
on: Jul 10, 2018
Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to have earnings before interest and taxes of 100,000 during the coming year.
 
  In addition, Go Debt is expected to incur 40,000 in interest expenses as a result of its borrowings whereas No Debt will incur no interest expense because it does not use debt financing. However, No Debt will have to pay stockholders 40,000 in dividend income. Both firms are in the 40 percent tax bracket. Calculate the Earnings after tax for both firms. Which firm has the higher after-tax earnings? Which firm appears to have the higher cash flow? How do you account for the difference?

Question 2

Using the risk-adjusted discount rate method of project evaluation, the NPV for Project N is ________. (See Table 11.8)
 
  A) 166,132
  B) 122,970
  C) 85,732
  D) 600,000


blfontai

  • Sr. Member
  • ****
  • Posts: 327
Reply #1 on: Jul 10, 2018
Answer to Question 1

Go Debt has lower earnings after taxes compared to No Debt. However, from a cash outflow perspective, Go Debt paid out a total of only 64,000 (40,000 in interest expenses plus 24,000 in taxes) while No debt paid out a total of 80,000 (40,000 in taxes and 40,000 in dividends). The difference between the two is 16,000 which is exactly the difference in taxes paid between the two firms (24,000 compared to 40,000). This difference results from the fact that interest expense is a tax deductible expense.

Answer to Question 2

C


Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question

sabina

  • Hero Member
  • *****
  • Posts: 563
Reply #2 on: Jul 10, 2018
TY


blfontai

  • Sr. Member
  • ****
  • Posts: 327
Reply #3 on: Jul 10, 2018
Happy to Help


« previous next »
 

Did you know?

The average adult has about 21 square feet of skin.

Did you know?

When Gabriel Fahrenheit invented the first mercury thermometer, he called "zero degrees" the lowest temperature he was able to attain with a mixture of ice and salt. For the upper point of his scale, he used 96°, which he measured as normal human body temperature (we know it to be 98.6° today because of more accurate thermometers).

Did you know?

The longest a person has survived after a heart transplant is 24 years.

Did you know?

Between 1999 and 2012, American adults with high total cholesterol decreased from 18.3% to 12.9%

Did you know?

People who have myopia, or nearsightedness, are not able to see objects at a distance but only up close. It occurs when the cornea is either curved too steeply, the eye is too long, or both. This condition is progressive and worsens with time. More than 100 million people in the United States are nearsighted, but only 20% of those are born with the condition. Diet, eye exercise, drug therapy, and corrective lenses can all help manage nearsightedness.

Examples of USP labels Source: Courtesy of Novartis Pharmaceuticals Corporation and Mallinckrodt Pha Examples of USP labels Source: Courtesy of Novartis Pharmaceuticals Corporation and Mallinckrodt Pha
In 2009, historian Woody Holton described how Abigail Adams shrewdly invested in the Continental Con In 2009, historian Woody Holton described how Abigail Adams shrewdly invested in the Continental Con
A passenger train crosses Stony Creek Bridge in the Rocky Mountains in 1878. Railroads were importan A passenger train crosses Stony Creek Bridge in the Rocky Mountains in 1878. Railroads were importan
For centuries, widows in the Mediterranean countries, such as thise widow in Greece, were expected ... For centuries, widows in the Mediterranean countries, such as thise widow in Greece, were expected ...
Expected Distribution of IQ Scores Expected Distribution of IQ Scores
A debt payment of $7500 is due in 24 months. If money is worth 7.2% p.a. compounded quarterly, ... A debt payment of $7500 is due in 24 months. If money is worth 7.2% p.a. compounded quarterly, ...
Video: Interspecific Competition Relationship - Competitive & Niche Differentiation

For a complete list of videos, visit our video library