Corporate Tax Rate Schedule Taxable income brackets Tax calculation Base tax + (Marginal rate amount over bracket lower limit) $ 0 to $ 9,525 $ 0 + (10% amount over $ 0) 9,525 to 38,700 $ 953 + (12% amount over $ 9,525) 38,700 to 82,500 $ 4,454 + (22% amount over $ 38,700) 82,500 to 157,500 $ 14,090 + (24% amount over $ 82,500) 157,500 to 200,000 $ 32,090 + (32% amount over $157,500) 200,000 to 500,000 $ 45,690 + (35% amount over $200,000) Over 500,000 $150,690 + (37% amount over $500,000)

Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision, it has asked you to calculate the corporate tax consequences of such a decision. Currently, Hemingway generates before-tax yearly income of $200,000 and has no debt outstanding. Expanding operations would allow Hemingway to increase before-tax yearly income to $350,000. Hemingway can use either cash reserves or debt to finance its expansion. If Hemingway uses debt, it will have a yearly interest expense of $70,000. Create a spreadsheet to conduct a tax analysis (assume a 21% flat tax rate) for Hemingway Corporation and determine the following:

A. What is Hemingways current annual corporate tax liability?

B. What is Hemingways current average tax rate?

C. If Hemingway finances its expansion using cash reserves, what will be its new corporate tax liability and average tax rate?

D. If Hemingway finances its expansion using debt, what will be its new corporate tax liability and average tax rate?

E. What would you recommend the firm do? Why?