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?

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Business

Mario Walker

21 September, 13:42

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?

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Holly · 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.

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.