Question
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $14 million, $23 million, or
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $14 million, $23 million, or $32 million. Its corporate tax rate is 38%, and investors pay a 15% tax rate on income from equity and a 35% tax rate on interest income.
a. What is the effective tax advantage of debt if PMF has interest expenses of $11 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $32 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $14 million and $23 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit?
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