Question

Grommit Engineering expects to have net income next year of

$42.16

million and free cash flow of

$22.27

million. ​ Grommit's marginal corporate tax rate is

35%.

a. If Grommit increases leverage so that its interest expense rises by

$13.5

​million, how will net income​ change?

b. For the same increase in interest​ expense, how will free cash flow​ change?

Answer 1

Given,

Net income = $42.16 million

Free cash flow = $22.27 million

Tax rate = 35% or 0.35

Solution :-

(a)

Increase in interest expense = $13.5 million

New net income = Net income - [Increase in interest expense x (1 - tax rate)]

= $42.16 million - [$13.5 million x (1 - 0.35)]

= $42.16 million - [$13.5 million x 0.65]

= $42.16 million - $8.775 million = $33.385 million

So, net income will fall to $33.385 million, if its interest expense rises by $13.5 million.

(b)

Increase in interest expense will not lead to any change in free cash flow.

answered by: anonymous