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Firm A EBIT 100 Interest 40 Pre tax Income 60 Tax (35% of Pre Tax 21 Income) Net Income 39 Firm B 100 0 100

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Firm A EBIT 100 Interest 40 Pre tax Income 60 Tax (35% of Pre Tax 21 Income) Net Income 39 Firm B 100 0 100 35 65 Firm A and B both have earnings before interest and taxes but Firm A pays out part of the profit as debt interest a) What impact does it have on the tax of both firm? b) Recalculate the figures assuming that Firm A now has to make interest payment of $60 million. c) What happens to taxes paid? d) Does net Income fall by the additional $20 million interest payment compared to the earlier scenario where interest expense was only $40 million

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