Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision

Question:

Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision they have asked you to calculate the corporate tax consequences of their 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 yearly interest expense of $70,000.

TO DO

Create a spreadsheet to conduct a tax analysis for Hemingway Corporation and determine the following: 

  a. What is Hemingway’s current annual corporate tax liability? 

  b. What is Hemingway’s 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 that the firm do? Why?  

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Related Book For  book-img-for-question

Principles Of Managerial Finance

ISBN: 978-0136119463

13th Edition

Authors: Lawrence J. Gitman, Chad J. Zutter

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