Answer:
(a) $35 million; $30.8 million
(b) (i) $0; $65 million
(ii) $12 million; $57.2 million
Explanation:
(a) Tax on Haricot Corp. = corporate tax rate × profits
= 35% × $100 million
= $35 million
Interest on dept of Pinto = Issued by Pinto × Rate of debt
= $150 million × 8%
= $12 million
Pinto's profit after interest = Profits - Interest
= $100 million - $12 million
= $88 million
Therefore,
Tax on Pinto Corp. = corporate tax rate × profits after interest
= 35% × $88 million
= $30.8 million
(b)
Haricot Corp.:
Return to Debtholders = $0
Return to shareholders = Profits - Tax amount
= $100 million - $35 million
= $65 million
Pinto Corp.:
Return to Debtholders = $12 million
Return to shareholders = Profits - Tax amount - Interest
= $100 million - $30.8 million - $12 million
= $57.2 million
