Question

Grommit Engineering expects to have net income next year of million and free cash flow of million. ​ Grommit's marginal corporate tax rate is . a. If Grommit increases leverage so that its interest expense rises by ​million, how will net income​ change? b. For the same increase in interest​ expense, how will free cash flow​ change?

Answer 1

Answer and Explanation:

a. The change in the net income should be

= Net income next year - (1 × (1 - tax rate)

= $20.75  million - (1 × (1 - 0.35)

= $20.1 million

b. The change in the free cash flow would be that it is not impacted as it determined from the earnings before interest and taxes only

Therefore the same is to be considered