A company acquires a $200 factory: 50% cash, 50% debt at 10% interest (half PIK, half cash). 10-year straight-line depreciation, no salvage. Walk through Year 1 (20% tax rate).

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Accepted Answer

IS: Depreciation $20 ($200/10), Interest expense $10 ($100 debt × 10%). PTI −$30, tax shield +$6, NI −$24.

A company acquires a $200 factory: 50% cash, 50% debt at 10% interest (half PIK, half cash). 10-year straight-line depreciation, no salvage. Walk through Year 1 (20% tax rate).

Answer

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