Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors.Assume the corporate tax rate is 40 percent. (Hint: Calculate the tax savings arising from the tax deductibility of interest payments).
$$\begin{array} { l r r r r }
& { \text { Levered } } & { \text { Unlevered } } \
\text { Reverue } & \$ 250 & \$ 250 \
\text { Operating cost } & - \$ 100 & - \$ 100 \
\text { Interest expense } & - \$ 20 & \$ 0
\end{array}$$

Question

Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors.Assume the corporate tax rate is 40 percent. (Hint: Calculate the tax savings arising from the tax deductibility of interest payments).
$$\begin{array} { l r r r r } 
&  { \text { Levered } } & { \text { Unlevered } } \
\text { Reverue } & \$ 250 & \$  250 \
\text { Operating cost } & - \$ 100 & - \$  100 \
\text { Interest expense } & - \$  20 & \$ 0
\end{array}$$

Quizplus · Accepted Answer

The difference in cash flow available to investors between the levered and unlevered firm is due to the tax shield on the interest expense. 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 additional cash flow available to investors in the levered firm compared to the unlevered firm.

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