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PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit...

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Finance

PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $9 million, $14 million, or $19 million. Its corporate tax rate is 35%, and investors pay a 25% 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 $7 million this coming year?

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

c. What is the expected effective tax advantage of debt for interest expenses between $9 million and $14 million? (Ignore carryforwards).

d. What level of interest expense provides PMF with the greatest tax benefit?

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