Item$21$

Item $21$

Two firms have the same earnings before interest and taxes of $$400,000$ and both have a tax rate of $40\%.$ Firm A has $$10,000$ interest expense whereas firm B has no interest expense. The two firms' earnings after tax net income is:

Multiple Choice

The same

Firm A has higher net income

Firm B has lower tax expense

The difference in net income is smaller than that of interest expense due to the tax reduction on interest expense