Question

and Airline A and Airline B both have earnings before interest and taxes (EBIT) of $100 million. Airline B has no debt, while Airline A has interest expenses of $20 million. Assume a tax rate of 35% applies to both airlines. How much will Airline B pay in taxes

Answer 1

Answer:

Airline B pay $35 million in tax

Explanation:

Tax is charged on profit before tax

Profit before Tax (PBT) = EBIT - interest expenses

Tax occurred = PBT * Tax rate

Airline B has no debt, then:

PBT = ($100 million - 0)= $100 million; and

Tax occurred = $100 million * 35% = $35 million

Airline A has interest expenses of $20 million, then:

PBT = $100 million - $20 million =  $80 million; and

Tax occurred = $80 million * 35% = $28 million