Crowther Company expects to earn $80,000 before interest and taxes and the tax r

Question

Crowther Company expects to earn $80,000 before interest and taxes and the tax rate is 40% of income. The company needs $200,000 of financing. Its choices are debt that costs 8% per year or stock with an expected dividend payment of $16,000 per year. Which of the following statements would be relevant to Crowther Company's decision?

a. The total cash paid would be higher if debt financing is used.

b. Net income would be lower if equity financing is used.

c. The total cash paid would be lower if equity financing is used.

d. Net income would be lower if debt financing is used.

Crowther Company expects to earn $80,000 before interest and taxes and the tax rate is 40% of income. The company needs $200,000 of financing. Its choices are debt that costs 8% per year or stock with an expected dividend payment of $16,000 per year. Which of the following statements would be relevant to Crowther Company's decision?

a. The total cash paid would be higher if debt financing is used.

b. Net income would be lower if equity financing is used.

c. The total cash paid would be lower if equity financing is used.

d. Net income would be lower if debt financing is used.

Explanation / Answer

Net income would be lower if debt financing is used. Option D is correct

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