IB Technical Question
Hi, I'm confused on why we assume that Net Income falls by $12 with a 40% tax rate. Where is the $12 coming from?
Now let’s go out 1 year, to the start of Year 2. Assume the debt is high-yield so no
principal is paid off, and assume an interest rate of 10%. Also assume the factories
depreciate at a rate of 10% per year. What happens?
After a year has passed, Apple must pay interest expense and must record the
depreciation.
Operating Income would decrease by $10 due to the 10% depreciation charge each year,
and the $10 in additional Interest Expense would decrease the Pre-Tax Income by $20
altogether ($10 from the depreciation and $10 from Interest Expense).
Assuming a tax rate of 40%, Net Income would fall by $12.
On the Cash Flow Statement, Net Income at the top is down by $12. Depreciation is a
non-cash expense, so you add it back and the end result is that Cash Flow from
Operations is down by $2...
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