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Grommit Engineering expects to have net income next year of $20.16 million and free cash flow of $22.28 million. Grommit's marginal corporate tax rate is 30%. a. If Grommit increases leverage so that its interest expense rises by $9.8 million, how will net income change? b. For the same increase in interest expense, how will free cash flow change?
a. If Grommit increases leverage so that its interest expense rises by $9.8 million, how will net income change?
Net income will fall to $_____ million. ? (Round to two decimal places.)
b. For the same increase in interest expense, how will free cash flow change (Select the best choice below.)
A. Free cash flow is not affected by interest expense.
B. Free cash flow increases by the amount of the interest expense.
C. Free cash flow decreases by the amount of the interest expense.
D. None of the above.
Consider the following information: Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B Recession 0.19 0.08 − 0.19 Normal 0.56 0.11 0.10 Boom 0.25 0.16 0.27 Calculate the expected return for the two stocks.
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