Company A and Company B are identical in all regards except that during 2016 Company A borrowed $40,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $40,000 from sale of common stock. Company B agreed to pay a $4,000 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of 2016, and by what amount?
A. Company A's retained earnings would be higher by $4,000. B. Company B's retained earnings would be higher by $2,800. C. Company A's retained earnings would be higher by $1,200.
D. Both would show the same retained earnings.
