Question

Consider the following income statement for Kroger Inc. (all figures in $ millions):

year	2006	2005	2004
total sales	60553	56434	53791
cost of goods sold	45565	42140	39637
SG&A expenses	11688	12191	11575
depreciation	1265	1256	1209
operating income	2035	847	1370
other income	0	0	0
EBIT	2035	847	1370
interest expense	525	555	580
earnings before tax	1510	292	790
taxes (35%)	529	102	277
Net Income	981	190	513

Calculate the interest tax shield, the total amount available to pay out to all the investors, and the income that would be available to equity holders if Kroger was not levered for each year.

Answer 1

If Kroger was not a levered firm it would not be paying any interest so there will be no interest tax shield

the income statement for the three years will look as under

year	2006	2005	2004
total sales	60553	56434	53791
cost of goods sold	45565	42140	39637
SG&A expenses	11688	12191	11575
depreciation	1265	1256	1209
operating income	2035	847	1370
other income	0	0	0
EBIT	2035	847	1370
interest expense	0	0	0
earnings before tax	2035	847	1370
taxes (35%)	712.25	296.45	479.5
Net Income	1322.75	550.55	890.5

Now since the firm is unlevered equity holders are the only investors in the firm

so net income is the amount availabe for pay out