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Part 1

Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):

EBIT	$1,000
Interest expense	0
Income before tax	$1,000
Taxes	300
Net income	$ 700

Approximately

$150,000

of Empire's earnings will be needed to make new,

positive-NPV

investments. Unfortunately, Empire's managers are expected to waste

10%

of its net income on needless perks, pet projects, and other expenditures that do not contribute to the firm. All remaining income will be distributed to shareholders.

a. What are the two benefits of debt financing for Empire?

b. By how much would each

$1

of interest expense reduce Empire's distributions to shareholders?c. What is the increase in the total funds Empire will pay to investors for each

$1

of interest expense?

Question content area bottom

Part 1

a. What are the two benefits of debt financing for Empire? (Select the best choice below.)

A.

Tax and interest cost benefits

B.

Dividend and tax benefits

C.

Interest cost benefits and reducing wasteful investment

D.

Tax benefits and reducing wasteful investment

Part 2

b. By how much would each

$1

of interest expense reduce Empire's distributions to shareholders?Each

$1

of interest expense would reduce Empire's distributions to shareholders by

$enter your response here.

(Round to three decimal places.)

Part 3

c. What is the increase in the total funds Empire will pay to investors for each

$1

of interest expense?

The

increase in the total funds Empire will pay to investors for each

$1

of interest expense is

$enter your response here.

(Round to three decimal places.)