PMF, Inc., is equally likely to have EBIT this coming year of $7 million, $16 million, or $25 million. Its corporate tax rate is 38%, and investors pay a 25% tax rate on income from equity and a 45% tax rate on interest income.

a. What is the effective tax advantage of debt if PMF has interest expenses of $6 million this coming year?

b. What is the effective tax advantage of debt for interest expenses in excess of $25 million?

(Ignore carryforwards.)

c. What is the expected effective tax advantage of debt for interest expenses between $7 million and $16 million? (Ignore carryforwards.)

d. What level of interest expense provides PMF with the greatest tax benefit?