Question
Hemingway Corporation is considering expanding its operations to boost itsincome, but before making a finaldecision, it has asked you to calculate the corporate tax consequences
Hemingway Corporation is considering expanding its operations to boost itsincome, but before making a finaldecision, it has asked you to calculate the corporate tax consequences of such a decision.Currently, Hemingway generatesbefore-tax yearly income of $205,000 and has no debt outstanding. Expanding operations would allow Hemingway to increasebefore-tax yearly income to $347,000. Hemingway can use either cash reserves or debt to finance its expansion. If Hemingway usesdebt, it will have a yearly interest expense of $65,000.
a. What isHemingway's current annual corporate taxliability?
b. If Hemingway finances its expansion using cashreserves, what will be its new corporate taxliability?
c. If Hemingway finances its expansion usingdebt, what will be its new corporate taxliability?
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