Suppose a firm\'s tax rate is 35%. a. What effect would a $9.72 mllion operating

Question

Suppose a firm's tax rate is 35%. a. What effect would a $9.72 mllion operating expense have on this year's earnings? What effect would it have on next year's earnings? b. What effect would a $7.85 million capital expense have on this year's earnings if the capital is depreciated at a rate of $1.57 million per year for five years? What effect would it have on next year's earnings? a. What effect would a $9.72 million operating expense have on this year's earnings? Earnings would increase (decline) by Smillion. (Round to two decimal places, and use a negative number for a decline.) What effect would it have on next year's earnings? (Select the best choice below.) O A. O B. Next year's earnings will be affected by the same amount. There would be no effect on next year's earnings. C. Next year's earnings will be affected by an increase of $3.40 million 0 D. Next year's earnings will be affected by a decline of $3.40 million. b. What effect would a $7.85 million capital expense have on this year's earnings if the capital is depreciated at a rate of $1.57 million per year for five years? What effect would it have on next years earnings? Earnings would be higher (lower) each year by s decline.) million. (Round to two decimal places, and use a negative number for a

Explanation / Answer

a) This year's earnings would decline by $9.72m X (1-0.35) = (-) $6.318m

Explanation: Multiplication of (1 - 0.35) is done because there will by Tax savings due to costs.

Effects on next years earnings: Option B is correct (it will have no effect on next years earnings)

b) Earnings of each year would be lower by = $1.57 m X (1 - 0.35) = $ (-) 1.0205m

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