PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally
Question:
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be \($10\) million, \($15\) million, or \($20\) million. Its corporate tax rate is 35%, 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 \($8\) million this coming year?
b. What is the effective tax advantage of debt for interest expenses in excess of \($20\) million? (Ignore carryforwards.)
c. What is the expected effective tax advantage of debt for interest expenses between \($10\) million and \($15\) million? (Ignore carryforwards.)
d. What level of interest expense provides PMF with the greatest tax benefit?
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