Corporation a Decides to Borrow $1,000,000 and Use the Money

question 44

Multiple Choice

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.Therefore,

• A) Corporation A's operating income will decrease due to higher interest expense.
• B) Corporation A's net income will increase due to the tax deductibility of interest expense.
• C) Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment.
• D) Corporation A's gross profit will decrease.