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Consider two hypothetical firms:  Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt.  Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms.          Firm U             Firm L    Assets                   €20,000           €20,000 Equity                   €20,000           €10,000           EBIT                       € 3,000            € 3,000 INT (12%)                 ?                        ?       EBT                           ?                        ? Taxes (40%)              ?                        ?             NI                           € ?                      €  ?

Consider two hypothetical firms:  Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt.  Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms.          Firm U             Firm L    Assets                   €20,000           €20,000 Equity                   €20,000           €10,000           EBIT                       € 3,000            € 3,000 INT (12%)                 ?                        ?       EBT                           ?                        ? Taxes (40%)              ?                        ?             NI                           € ?                      €  ?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Consider two hypothetical firms:  Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt.  Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms.      

 

 Firm U             Firm L   

Assets                   €20,000           €20,000

Equity                   €20,000           €10,000        

 

EBIT                       € 3,000            € 3,000

INT (12%)                 ?                        ?      

EBT                           ?                        ?

Taxes (40%)              ?                        ?            

NI                           € ?                      €  ?                   

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