Question
Effect of Permanent Difference on Income Tax Rates: A company has $1,200,000 income before interest expense and interest income on both its income
Effect of Permanent Difference on Income Tax Rates: \ A company has $1,200,000 income before interest \ expense and interest income on both its income statement (book) and tax forms (tax). The company also has \ $200,000 of interest expense that is tax deductible and $400,000 of municipal bond interest income that is \ 144 \ Chapter 3 \ | \ Measuring Free Cash Flows \ not taxable. The company has a 30% tax rate on all types of income. Calculate the companys effective tax \ rate and prepare a reconciliation between its 30% statutory rate and its effective tax rate. Also calculate the \ companys interest tax shield and the income tax rate for interest. Assuming the companys EBIT is $1,600,000 \ ($1,600,000 \ 5 \ $1,200,000 \ 1 \ $400,000), calculate the income tax the company would pay on EBIT.
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