Company a and Company B Are Identical in All Regards

question 7

Multiple Choice

Company A and Company B are identical in all regards except that during Year 1 Company A borrowed $40,000 at an interest rate of 10%.In contrast,Company B obtained financing by acquiring $40,000 from sale of common stock.Company B agreed to pay a $4,000 cash dividend each year.Both companies are in a 30% tax bracket.Which company would show the greater retained earnings at the end of Year 1,and by what amount?

• A)Company A's retained earnings would be higher by $4,000.
• B)Company B's retained earnings would be higher by $2,800.
• C)Company A's retained earnings would be higher by $1,200.
• D)Both would show the same retained earnings.

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