Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,
ID: 2621750 • Letter: C
Question
Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock. The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased. ThereforeCorporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock. The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased. Therefore
Explanation / Answer
net income will increase due to the tax deductibility of interest expense