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When interest expense is tax-deductible, firms could benefit from the tax shield of debt. Compare two firms with identical assets and operations. One has debt
When interest expense is tax-deductible, firms could benefit from the tax shield of debt. Compare two firms with identical assets and operations. One has debt and pays $30 in interest. The other has no debt. If both firms have a revenue of $80 and costs of operations of $20 (excluding interest expense), can you calculate and compare the after-tax payoffs to the two firms? Assume the corporate income tax rate is 20%.
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