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26. Assume that a firm has EBIT of $3 million. The firm is in the 30% tax bracket. If it uses debt to raise funds,
26. Assume that a firm has EBIT of $3 million. The firm is in the 30% tax bracket. If it uses debt to raise funds, they will pay $400,000 in interest expense. If they used equity to raise funds, they will pay no interest, but a dividend of $100,000. Calculate the tax shelter (tax savings) the firm receives by using debt instead of equity. A) $300,000 B) $30,000 C)$120,000 D) $90,000 3,000,000 400,000 3,000,000 100,000
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