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 $192,000 and has no debt outstanding. Expanding operations would allow Hemingway to increase before-tax yearly income to $335,000 Hemingway can use either cash reserves or debt to finance its expansion If Hemingway uses debt, Create a spreadsheet to conduct a tax analysis (assume a 21% flat tax rate) for Hemingway Corporation and determine the following:

d. What would you recommend the firm do?

The expansion using (debt/cash) would be recommended because it provides a tax savings of $(15,750/70,350/54,600) the tax bill is $(54,600/70,350/15,750) for the "expansion-using-debt" option versus $(70,350/54,600/15,750) for the "expansion-using-cash" option.