Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors. $$\begin{array}{l}

\begin{array} { l r r }
&\text { Levered} &\text { Unlevered }\
\text { Revenue } & \$ 250 & \$ 250 \
\text { Operating cost } & - \$ 100 & - \$ 100 \
\text { Interest expense } & - \$ 20 & \$ 0
\end{array}
\end{array}$$ Assume the corporate tax rate is 40%. (Hint: Calculate the tax savings arising from the tax deductibility of interest payments).

Question

Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors. $$\begin{array}{l}

\begin{array} { l r r } 
&\text { Levered} &\text { Unlevered }\
\text { Revenue } & \$ 250 & \$ 250 \
\text { Operating cost } & - \$ 100 & - \$ 100 \
\text { Interest expense } & - \$ 20 & \$ 0
\end{array}
\end{array}$$ Assume the corporate tax rate is 40%. (Hint: Calculate the tax savings arising from the tax deductibility of interest payments).

Quizplus · Accepted Answer

The difference in cash flow available to investors between the levered and unlevered firm is due to the tax shield on interest. The interest expense for the levered firm is $20, and the corporate tax rate is 40%. The tax savings from the interest expense is $20 * 40% = $8. This is the difference in cash flow available to investors between the two firms.

Given the Following Information for a Levered and Unlevered Firm,calculate