Suppose a firm\'s tax rate is 35% a. What effect would a $9.69 million operating

Question

Suppose a firm's tax rate is 35% a. What effect would a $9.69 million operating expense have on this year's earnings? What effect would it have on next year's earnings? b. What effect would an $8.65 million capital expense have on this year's earnings if the capital is depreciated at a rate of $1.73 million per year for five years? What effect would it have on next year's earnings? a. What effect would a $9.69 million operating expense have on this year's earnings? Earnings would increase decline by $ million Round to two decimal places, and use a negative number or a decline

Explanation / Answer

a) With an operating expense, earnings will be impacted only this year and not next.

Impact on Earnings = Operating Expense x (1 - tax rate)

= 9.69 x (1 - 35%)

= 6.30 million

As it is an expense, the earnings will decline by $6.30 million

Next year's earnings will not change at all.

b) With a capital expense, depreciation expense will impact earnings each year.

Change in earnings = Depreciation x (1 - tax) = 1.12 million

As depreciation is an expense, the earnings will decline by $1.12 million for the next five years.

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