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%. (Hint: Calculate the tax savings arising form the tax deductibility of interest payments). $$\begin{array} { r c c }
& \text { Levered } & \text { Unlevered } \
\hline \text { Revenue } & \$ 250 & \$ 250 \
\text { Operating cost } & - \$ 100 & - \$ 100 \
\text { Interest expense } & - \$ 20 & \$ 0
\end{array}$$

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%. (Hint: Calculate the tax savings arising form the tax deductibility of interest payments). $$\begin{array} { r c c } 
& \text { Levered } & \text { Unlevered } \
\hline \text { Revenue } & \$ 250 & \$ 250 \
\text { Operating cost } & - \$ 100 & - \$ 100 \
\text { Interest expense } & - \$ 20 & \$ 0
\end{array}$$

Quizplus · Accepted Answer

The tax savings from interest is $20 * 40% = $8. The difference in cash flow is due to this tax shield.

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