In Year 1, a company buys $100 of new factories funded entirely with debt at 10% interest (no principal paydown). Factories depreciate 10% straight-line. Walk through the three statements at the end of Year 1 (40% tax rate).

Question

Accepted Answer

IS: Depreciation −$10, Interest expense −$10. PTI −$20, taxes +$8 (shield), NI −$12.

In Year 1, a company buys $100 of new factories funded entirely with debt at 10% interest (no principal paydown). Factories depreciate 10% straight-line. Walk through the three statements at the end of Year 1 (40% tax rate).

Answer

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