Financial Management: Principles and Applications, 13/e

Long description

	Firm A	Firm B
Net Operating Income (EBIT)	$200.00	$200.00
Interest expense	0	0
Earnings before taxes	$200.00	$150.00
Income taxes	(50)	(37.50)
Net income	$150.00	$112.50

The text, Note that Firm B pays $37.50 in taxes, which is $12.50 less than Firm A. This is a result of the fact that the $50 Firm B paid in interest is tax-deductible points to the value (37.50) in Firm B column and the text below reads, This is not the case in all countries. The taxing authorities in a number of countries have changed their tax laws to reduce or eliminate the tax preference for debt financing.