A company had earnings before interest and taxes of $1.5 million in the most recent year,...

A company had earnings before interest and taxes of $1.5 million in the most recent year, and an interest expense of $250,000. The company has a marginal corporate tax rate of 35%. What is the net income for the leveraged company? What about the same company had they not used leverage (debt)?

a) If we compare the leveraged with the unleveraged company, how much was paid out to debt holders, equity holders, and total between the two?

b) We should see more being paid out total to investors in the leveraged company than the unleveraged company. Where does that difference come from?

Expert Solution

BECAUSE OF INTEREST, INCOME BEFORE TAX DECREASE, SO LESS TAX IS PAID OUT, WHICH WILL GENERALLY CALL AS INTEREST TAX SHIELD.

jeff jeffy answered 1 year ago

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