Consider two firms, go debt corporation and no debt corporation. Both firms are expected to have earnings before interest and taxes of 300,000 during the coming year. In addition, go debt is expected to incur 80,000 in interest expense as a result of its borrowings whereas no debt will incur no interest expense because it does no use debt financing.
However, no debt will have to pay stockholders 80000 in dividend income. Both firms are in the 35 percent tax bracket. Calculate the earnings after tax both firms. Which firm has higher after-tax earnings? which firm appears to have higher cash flow? how do you account for the difference? Get Finance homework help today