When companies borrow and pay interest, a change in ______ is magnified into a relatively larger change in net income.
Added by Tony C.
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When a company borrows money, it incurs fixed interest expenses that must be paid regardless of its operating income. Show more…
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Which of the following options is true? Because interest payments are tax deductible, a company’s net income increases following the issuance of debt. Because interest payments are tax deductible, a company’s OPAT increases following the issuance of debt.
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Consider a company with the following income statement (in millions): Operating Income: 4259 Net Interest Expense: (850) EBT: 3409.09 Income Tax Expense: 681.8 Net Income: 2727.2 1.1 Consider the impact of the issuance of $12B in new debt at a 4% interest rate. Net income after the debt issuance will be equal to ______ 1.2 Which of the following statements is correct? If the company had issued $12B of equity rather than debt, net income would have been lower because dividends are higher than interest payments. The NPV of the $12B debt issuance is likely to be negative because it reduces the company's net income. If markets are efficient, the NPVs of both debt and equity issuance should be close to zero. If the interest rate increases to 5%, the company should no longer issue debt because debt became more expensive. 1.3 Current OPAT (operating profits after taxes) is __________ 1.4 Following a debt issuance of $12B at a 4% interest rate, the new OPAT (operating profits after taxes) will be____________
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