Red and Blue have EBIT of $20.0M and pay tax at a flat rate of 30%. Red is equity financed and pays $1.2M in dividends while Blue is debt financed and pays 1.2M in interest. How much will each company add to its retained earnings for the year. Explain the difference.

Question

Red and Blue have EBIT of $20.0M and pay tax at a flat rate of 30%.  Red is equity financed and pays $1.2M in dividends while Blue is debt financed and pays 1.2M in interest.  How much will each company add to its retained earnings for the year.  Explain the difference.

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The Answer of Red and Blue have EBIT of $20.0M and pay tax at a flat rate of 30%.  Red is equity financed and pays $1.2M in dividends while Blue is debt financed and pays 1.2M in interest.  How much will each company add to its retained earnings for the year.  Explain the difference.

Red and Blue Have EBIT of $20