CAN YOU EXPLAIN THIS FIGURE?

FIGURE 15.1 The Cash Flows of the Unlevered and Levered Firm Taxes Taxes Pretax Cash Flow (EBIT) Levered Earnings By increasing the cash flows paid to debt holders through interest payments, a firm reduces the amount paid in taxes. Cash flows paid to investors are shown in blue. The increase in total cash flows paid to investors is the interest tax shield. (The figure assumes a 40% marginal corporate tax rate.) 1000 900 800 700 600 500 400 300 200 Cash Flow Interest Tax Shield Unlevered Earnings Interest on Debt 100 0 Assets Unlevered Firm Levered Firm