What will be the total amount received by the firm

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Question: Eddy is the sole owner of his firm. He now wishes to purchase the company next door for $600,000. His calculations show that the annual income before tax from the purchase is $80,000. He is considering two financing alternatives: The first is to ask for a personal loan of $300,000 and pay the remaining amount from his savings. The second alternative is to finance the purchase by having his firm take the $300,000 loan. Assuming the interest rate on the loan is 9% (for infinite duration) and the corporate tax rate is 40%, what will be the total amount received by the firm's share holders and debt holders in each scenario, assuming that only the interest paid by Eddy's firm is an expense for tax purposes.

Reference no: EM131477278

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