Wolverine Manufacturing is an all equity firm that had a loss of $1 million this

Question

Wolverine Manufacturing is an all equity firm that had a loss of $1 million this year. This loss can be carried forward against next years income. There is a 50% chance that wolverine will have a pre-tax income of $2 million next year and a 50% that their pre-tax income will be $500,00 next year. The corporate tax rate is 40% and there are no personal taxes. If Wolverine takes on $2,000,000 in debt that promises a 10% annual interest payment, what are the expected corporate tax savings for next year?

Explanation / Answer

Interest Expense = 0.1*2M = $200,000.

In any scenario, profit is higher than the interest expenses. Thus, we make corporate tax savings.

corporate tax savings = Tax Rate* Interest Expense
= 40%*200,000 = $80,000

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.