Question
(The following information and Exhibit 1 apply to questions 1 through 4.) Consider the two companies below, Bull and Bear, which are identical in terms
(The following information and Exhibit 1 apply to questions 1 through 4.) Consider the two companies below, Bull and Bear, which are identical in terms of revenue and costs, and hence identical in terms of EBIT (earnings before interest and taxes). They are also identical in terms of the corporate tax rate they face, which is 35%.Bull has no debt. Bear, on the other hand, has $400 million of debt, on which it pays an annual interest rate of 6%. Exhibit 1 (In Millions of $) BullBear Bull Bear Revenue $500.0 $500.0 Costs $250.0 $250.0 EBIT $250.0 $250.0 Interest Earnings Before Taxes Corporate Tax Net Income
What is the tax shield that Bear obtains because of its debt?
a) $9.8 million
b) $6.1 million
c) $8.4 million
d) $12.1 million
e) $4.3 million
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started