Question

Grommit Engineering expects to have net income next year of $ 40.13 million and free cash flow of $ 22.34 million. ​ Grommit's marginal corporate tax rate is 30 %. a. If Grommit increases leverage so that its interest expense rises by $ 16.1 ​million, how will net income​ change? b. For the same increase in interest​ expense, how will free cash flow​ change?

Answer 1

A.

If Grommit increases leverage so that its interest expense rises by $16.1M its net income will therefore fall by the after-tax interest expense.

B.

For the same increase in interest expense the free cash flow will not be affected.

Step-by-step explanation:

A.

If Grommit increases leverage so that its interest expense rises by $16.1M its net income will therefore fall by the after-tax interest expense.

40.13M -16.1*(1-0.30)

=40.13M-15.8

=$24.33M

B.

For the same increase in interest expense the free cash flow will not be affected.