Hemingway
Corporation is considering expanding its operations to boost its income, but
before making a final decision, it has asked you to calculate the corporate tax
consequences of such a decision. Currently, Hemingway generates before-tax
yearly income of $194,000 and has no debt outstanding. Expanding operations
would allow Hemingway to increase before-tax yearly income to $346,000. Hemingway
can use either cash reserves or debt to finance its expansion. If Hemingway
uses debt, it will have a yearly interest expense of $65,000. Create a
spreadsheet to conduct a tax analysis (assume a 21% flat tax rate) for
Hemingway Corporation and determine the following:
a. What is Hemingway’s
current annual corporate tax liability?
b. If Hemingway finances
its expansion using cash reserves, what will be its new corporate tax
liability?
c. If Hemingway finances
its expansion using debt, what will be its new corporate tax liability?
d. What would you
recommend the firm do?
a. Hemingway’s current
annual corporate tax liability is $ 58910)(Round to the nearest dollar.)
