With $10 of interest expense and a 20% tax rate, what is the effect on net income?

Study for the Private Equity Interview Test. Prepare with a range of questions and expert explanations to ensure success in landing your dream role. Optimize your readiness for the interview process!

Multiple Choice

With $10 of interest expense and a 20% tax rate, what is the effect on net income?

Explanation:
The effect comes from the tax shield created by a deductible expense. An interest expense of 10 reduces pretax income by 10, so taxes fall by 20% of that amount, which is 2. The net income change is the after‑tax impact: -10 + 2 = -8. So net income decreases by 8. The other options ignore the tax shield or misstate the direction of the effect.

The effect comes from the tax shield created by a deductible expense. An interest expense of 10 reduces pretax income by 10, so taxes fall by 20% of that amount, which is 2. The net income change is the after‑tax impact: -10 + 2 = -8. So net income decreases by 8. The other options ignore the tax shield or misstate the direction of the effect.

More Multiple Choice Questions
Subscribe

Get the latest from Passetra

You can unsubscribe at any time. Read our privacy policy