PMF, Inc. is equally likely to have EBIT this coming year of $7 million, $13 million, or $19 million. Its corporate tax rate is 35%, and investors pay a 15% tax rate on income from equity and a 40% tax rate on interest income.

a. What is the effective tax advantage of debt if PMF has interest expenses of $6 million this coming year?

b. What is the effective tax advantage of debt for interest expenses in excess of $19 million? (Ignore carryforwards.)

Answer rating: 100% (QA)

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